The International Tax Competitiveness Index (ITCI) measures the neutrality and efficiency of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems in OECD countries. However, one question that is regularly asked is why some countries with high tax burdens rank so well on competitiveness? Sweden provides a good example for this type of comparison.
Among OECD countries, Sweden had the 5th highest tax burden in 2016 as measured by total tax revenue as a percentage of GDP. The Swedish government collects 44.1 percent of GDP in tax revenues, nearly 10 percentage points higher than the 34.3 percent OECD average. However, in the 2018 ITCI, Sweden ranks relatively well with the 7th most competitive tax system out of 35 OECD countries.
France, meanwhile has been ranked last on the ITCI for the last five years and has a similar overall tax burden as Sweden at 45.3 percent of GDP. At the other end of the scale, Mexico has a relatively low tax burden at 17.2 percent of GDP and ranks 29th out of 35 countries on the ITCI. The difference lies in the design of various tax policies in each country.
The ITCI focuses on measures that are often unrelated to the overall tax burden. The index evaluates more than 40 tax policy variables that impact decision-making by businesses and individuals. If a country has well-designed policies that create few distortions, a large tax burden might be the result of efficient levies. On the other hand, if a country has tax policies that create multiple layers of tax on the same activity or causes serious economic distortions, those countries fare worse in the index.
Sweden’s tax code compares well to other OECD countries because it has competitive corporate, property, and international tax policies. The corporate tax rate in Sweden is 22 percent, below the OECD average of 23.9 percent. The tax code also allows companies to be taxed on their average profitability by allowing net operating losses to be carried forward indefinitely. Paired together, these make for both a competitive and neutral approach to taxing corporate income.
On property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, Sweden ranks well on the ITCI partially because it allows businesses to deduct their property tax bill from their income tax bill. This helps to minimize the impact the property tax can have on business investment in buildings and structures. Sweden also has relatively few distortive taxes on personal property, even though the government administers a financial transaction tax and a property transfer tax.
The international tax system in Sweden exempts both foreign dividends and capital gains income from taxation. The broad tax treaty network with 81 other countries helps provide multinational businesses with certainty when they choose to move some of their production to Sweden.
Now, the Swedish tax system is far from perfect. The personal dividend tax rate is 30 percent, above the OECD average of 24 percent, and the progressive individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. has a combined top rate of 60 percent. The ITCI reflects these policies and ranks Sweden 20th out of 35 countries on personal income taxes.
Additionally, consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es in Sweden are not efficiently designed. Sweden ranks 16th out of 35 countries on consumption taxes partly due to the relatively high VAT rate of 25 percent, but also due to the design of the VAT base. In Sweden, the VAT collects 57 percent of potential revenue. The gap is mainly due to special rates applied to some foods, clothing, and other items. Well-designed consumption taxes have a broad base with few, if any, specially rated items.
Sweden’s overall rank of 7th on the ITCI is relative to the most competitive system in the OECD – a spot that has been held by Estonia in each of the five years that the ITCI has been published. Estonia has an overall tax burden of 34.7 percent.
Though the top ten is a nice place to be, there is always room for improvement. If Sweden improves the way it taxes individual income and consumption, it can improve even more on the ITCI.Share