Swedish firms need tax cuts too

Sweden public debate on tax cuts has focused on the tax burden for individuals. But Sweden's companies also labour under one of the EU's highest tax burdens, argues Captus's Nima Sanandaji.

The average Swedish worker pays around 60 percent of his or her earnings in visible or hidden taxes. This situation is in the long run problematic, since high taxes combined with generous welfare systems undermine social norms associated with hard work and responsibility.

The public debate on tax tends to be limited to the tax on personal income, but Swedish companies are also burdened by heavy taxes. This is a problem that should not be neglected. It is true that many individuals with good jobs understand that they can significantly increase their standard of living if they move to the US or the UK. Indeed thousands of Swedes with good educations already take advantage of this realization, often settling in London.

In practice, however, people are less flexible than firms, which are more likely to establish themselves offshore to seek a more business-friendly environment. Those companies that remain in Sweden have to face the realities of international competition on a day to day basis in a global market where high taxes act as a handicap.

An international comparison of Sweden and ten other EU-countries performed by the tax consulting company Deloitte has recently shown that Swedish firms have the highest taxes in almost all scenarios tested. The only exception is for companies with very high profit margins, in which case Swedish firms have the fourth highest taxes.

The survey by Deloitte shows that the countries with the lowest taxes include the UK and the Baltic nations. In particular our Baltic neighbours are taking advantage of a strongly pro-market business environment and are developing rapidly, much thanks to low taxes that attract foreign investments and stimulate internal development.

Since the market economy was introduced in China and liberal economic reforms were implemented in India a debate has been going on regarding how Sweden can face global competition from these rapidly growing economies.

But the competition from the Baltic nations might very well be a more important factor for Swedish enterprise. These countries are in many ways similar to Sweden and the geographical distance is slim. Wages are still much lower than in Sweden and the traditional working ethics that to a large degree has eroded in the Swedish welfare system is very much alive on the other side of the Baltic Sea. Already many Swedish companies are choosing to establish themselves in the Baltic countries, a trend that very well might accelerate with time.

In Estonia companies do not have to pay any taxes on income reinvested in the firm. The flat tax stands at just 22 percent and it is planned to reduce this to 18 percent. As the Swedish author Johan Norberg pointed out (with his tongue firmly in his cheek), the growth rate seems to be converging with the tax rate – with growth approaching 11 percent this year.

With time it might very well become a common phenomenon for Swedish high income takers to settle in Tallinn rather than Stockholm. The language is the same and the travel distance is very much manageable. If one can earn as much in Tallinn as in Stockholm, the sum left after taxes for a high income taker would be close to the double in Tallinn, where the consumer prises are also lower.

The newly elected government has indeed implemented many positive reforms. But if Sweden is to remain a strong economy and to once again attain the much stronger economic position we enjoyed relative to the rest of the world around some 35 years ago, it is important to remember that we have a long way to go in improving the situation for Swedish entrepreneurs and workers alike.

We must never forget that we constantly compete for capital, companies and hard working individuals with other nations. Reforms towards a more business-friendly and work-friendly environment must thus continuously be developed. For this reason, taxes have to be cut. And cut more dramatically than the current administration seems willing to do.

Nima Sanandaji is the president of the Swedish free market think tank Captus and publisher of the weekly online Swedish magazine Captus Tidning. He is also a PhD student at The Royal Institute of Technology in Stockholm.