Bending the rules: Sweden in transition

Bending the rules: Sweden in transition
Nima Sanandaji speaks to one of the co-authors of a book examining the increasing propensity of Swedes to skirt around the edges of the country's tax and social welfare systems.

Ever since the 2006 elections, Swedish politics has centred on various scandals in which top officials have been accused of paying cleaners and labourers cash-in-hand in order to dodge taxes.

Some argue that this is due to centre-right representatives being more prone to bending the rules. Others state that journalists are more willing to scrutinize the new government than they were when the socialists held sway.

In a recently published book, however, a number of heavyweight economists provide a different perspective: Reinfeldt’s ministers are not the only ones sidelining the system. We may in fact be witnessing a major transformation as increasing numbers of Swedes choose to bypass the social system.

“People adjust their daily lives according to the social systems in which they live,” says Fredrik Bergström, president of the Swedish Retail Institute.

“In Sweden we have created systems that can often become rather difficult to live with. One example of this is paying for having work done on your house on the black market. Purchasing a house is the most important investment that most Swedes make in their lifetimes and it is vital to make some repairs from time to time. But Sweden’s high taxes make it difficult to purchase services legally.”

Bergström, who has a PhD in Economics, is co-author of the book Plan B – den dolda jakten på välfärd (Plan B – The Hidden Quest for Welfare).

The book’s other authors include Associate Professor Nils Karlsson (president of economic research institute Ratio), Professor Stefan Fölster (chief economist at the Confederation of Swedish Enterprise) and Robert Gidehag (president of The Swedish Taxpayers Association).

The release of Plan B last October was accompanied by an opinion piece in Dagens Nyheter, in which the authors explained that 95 percent of Swedes had confessed to having, in one way or another, tampered with social welfare systems for their own benefit.

Bergström explains that our ministers are not the only ones challenging the system. Sweden was once a country in which it was very common to choose “Plan A” – to live your life according to existing social systems. Today, however it has become common to go for “Plan B” and bend the rules.

In their book, Bergström and his fellow authors explain that a Swede with a marginal tax a little over fifty percent must earn 28,550 kronor in order to have 10,000 kronor left over after visible and hidden taxes have been paid.

If the latter sum is to be paid to a labourer facing the same marginal tax, the labourer will have just 2,196 kronor left after taxes. Thus only 8 percent of the original sum can be consumed by the person performing the service, with 92 percent going to taxes.

Bergström explains that individuals facing this situation have a number of choices. They can remain loyal to the system and purchase services on the “white” market, which will be very costly.

Or they can adapt to the system and choose to spend their summer vacations doing repairs themselves. The third option is to pay a few thousand kronor to a labourer on the black market to get the same job done.

During the writing of Plan B, a survey of more than a thousand Swedes showed that a majority had chosen to repair their houses themselves rather than pay professionals to do the job. Over 17 percent admitted to having hired handicraft on the black market, while over 10 percent admitted to themselves having worked on the black market.

Another example given by Bergström relates to the fact that Swedes must often wait a long time to see a doctor, while some patients are simply denied treatment in the public health care system:

“More and more Swedes are choosing to adapt to the system by using personal contacts with physicians to get a better quality of healthcare. Others sign up for private health insurance even though they are already paying into the system through taxes. Some choose to travel abroad to get the care they need.

“This is in contrast to the behaviour which we could previously observe in Sweden, where it was far less common to challenge the system and attempt to find alternative solutions.”

In their survey, the authors of Plan B found that almost 19 percent of Swedes confessed to having gained access to healthcare, either for themselves or a relative, by using personal contacts rather than going through regular administrative channels.

At the same time, 15 percent of those surveyed said that they had spent time taking care of a person close to them for an illness that should have been dealt with by the public healthcare sector.

What we are seeing, Bergström explains, is a long term adaptation to Sweden’s existing political systems. The relationship between the individual and the system has changed over time:

“Since the expansion of taxes and welfare services in the 70s, Swedes have progressively altered their attitude towards social systems. An increasing number of Swedes are today willing to break or bend the rules in order to benefit themselves. This kind of behaviour has over time become quite acceptable among many Swedes.

“When you know that your neighbours have started paying for repair of their houses cash-in-hand, you might think to yourself: ‘Why should I obey the rules when everybody else is bending them?’. Cheating will become common and the state must reinforce control mechanisms which reduce individual freedom.”

This change in social norms has also meant that Swedes are increasingly relying on themselves rather than the state to solve their daily problems. Bergström explains that the alternatives to public welfare chosen by Swedes often do not involve breaking the law. Rather, individuals find various methods of going around public systems to fulfil various needs:

“Another aspect of the social change we have seen in Sweden over time is that, in a globalized world, many individuals can choose what we refer to as ‘exit behaviour’. That is, if you face problems with one system, you simply leave it for another.

“An example of this is that many Swedes with high incomes end up living abroad to escape the taxes. We see this behaviour both amongst famous athletes and ordinary businessmen and professionals.”

Over the years it has become common for Swedes to invest their money abroad to dodge wealth tax. In order to stop this phenomenon, the government finally decided to abolish the tax. When individuals don’t follow the system, sometimes the system must change.

Similarly, the Swedish Tax Agency is working on a proposal to increase the amount that can be paid for a service without having to report the activity as taxable. According to the proposal, this amount will increase from today’s 999 kronor to 10,000 kronor. Prime Minister Fredrik Reinfeldt has supported this idea, since it would mean that fewer Swedes would cheat the system.

In a globalized world, exit behaviour could increasingly put pressure on the government to implement reforms. For example, Sweden’s close neighbour Estonia has a flat tax combined with one of the lowest tax rates in the world, while we arguably have the highest. If enough individuals and firms establish themselves in countries such as Estonia rather than Sweden, the Swedish system must change in order to survive.

Bergström concludes by remarking that a functioning society must be based on people following the rules and paying their taxes. At the same time, we must understand that there is a reason why Swedes over time have become less loyal to the Swedish model. Some public systems are simply too difficult and costly for individuals to always follow.

Moderate ministers paying for services cash-in-hand might well be the tip of the iceberg, indicating a deep-rooted change in Swedes’ relationship to their welfare systems. It is a change which, in the long run, might well lead to major alterations in the Swedish welfare system.

‘Plan B – den dolda jakten på välfärd’ is published by Ekerlids. The book’s authors are: Fredrik Bergström, Stefan Fölster, Linda Genf, Robert Gidehag, Nils Karlsson, Henrik Lindberg, Johan Marcus and Helena Olsson.

Nima Sanandaji is president of the Swedish free market think tank Captus and publisher of Captus Magazine.