Sweden has been much in the news recently following the comments by Rep. Alexandria Ocasio-Cortez that her proposal to boost the top income 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. rate in the U.S. to 70 percent is based on the tax policies in the Scandinavian nation.
According to a recent Reuters news report, it would seem that Sweden is trying to reverse its reputation for high taxes. After four months of attempting to build a coalition government, Reuters reports that “Prime Minister Stefan Lofven’s Social Democrats have agreed to a draft policy deal with the Centre, Liberal and Green parties” that “would cut taxes for wage-earners and companies.”
Below are key reforms outlined in the draft agreement according to Reuters.
- “A broad tax reform is to be implemented that would lower taxes on income and enterprise. The reform includes an agreement to cut marginal tax rates and raise the threshold at which people start to pay the higher rate of tax.
- “While income taxes are lowered, environmental taxes will be increased by at least 15 billion Swedish crowns ($1.66 billion) to help offset the loss of revenue.
- “Taxes for retirees to be lowered in 2020 and pensions raised for those on low and medium incomes.
- “Corporate taxes, especially for small and medium-sized companies, are to be made more [favorable]. Social contribution fees paid by companies are to be lowered while tax breaks for household services are to be extended.
- “[Labor] regulations are to be adapted in a way that would allow companies greater leeway regarding whom to lay off in case of redundancies.
- “Taxes on stock options will be lowered to make Sweden more attractive for start-ups in an international perspective.
- “Interest rate payments on deferred taxes on housing sales will be abolished.”
While the debate in the U.S. has focused on Sweden’s top marginal personal income tax rate of 57 percent, few have mentioned that Sweden has one of the lowest corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates in Europe, at 22 percent. Moreover, Sweden abolished its estate and inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. a few years ago and, unlike other European countries, it does not have a wealth tax.
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Because of Sweden’s high-tax reputation, many are surprised that the country ranks 7th best on the Tax Foundation’s International Tax Competitiveness Index. The Index ranks OECD countries on how they raise taxes, not on how much they raise. Tax systems are judged on how little they distort economic behavior (tax neutrality) and how low their rates are relative to other countries (their competitiveness). Some of Sweden’s rates are high, such as the 25 percent Value-Added Tax, but they are levied on a broad base with a minimal amount of exemptions or carveouts for certain industries or products.
The tax cuts proposed by the new coalition government could well make Sweden even more competitive, despite how many Americans inaccurately view it as a socialist paradise.
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