‘High taxes do not equate to an effective welfare state’

'High taxes do not equate to an effective welfare state'
Sweden's high tax regime is counterproductive: rather than focusing on the improvement of core services, it has led to a bloated bureaucracy and an inefficient welfare state, argue Nima Sanandaji and Robert Gidehag of the Swedish Taxpayers Association.

Sweden is a nation with extraordinarily high tax rates. The average worker not only pays 30 percent of income in visible taxes, but also close to 30 percent in hidden taxes. Defenders of this punishing tax burden argue that it is needed to maintain Sweden’s generous welfare system. But while this claim may seem reasonable on its surface, a closer inspection suggests that it is based on flawed analyses.

Some level of taxation is of course required to fund the public sector. At the same time, a high level of taxation does not necessarily translate into an equally high level of welfare:

– High taxes do not always mean high tax revenues since taxes discourage work and encourage tax avoidance. There is strong evidence that the highest rates of individual and capital taxation in Sweden are so distortive that they reduce public revenue. For this reason, some taxes, such as the wealth tax, have recently been reduced, with the net result estimated to increase tax revenues.

– Much of the welfare sector in Sweden is provided through municipalities. The Swedish Association of Local Authorities and Regions has shown in a study that funding for Swedish municipalities grew dramatically between 1980-2005. Despite this the general public consensus is that the quality of welfare has declined during the same period.

– A government survey has shown that when Swedish municipalities receive increased funding from the state, the money is used to expand the local bureaucracy instead of providing for more educators and health care workers.

– A research paper from 2005 examines the efficiency of the public sector in 23 industrialized countries. The paper has found that Sweden only reaches a mediocre 12th place when it comes to how much the public sector provides in terms of welfare services. When the level of welfare is related to the level of taxation, Sweden falls to the last position in the index.

– The Swedish Taxpayers Association has in a number of surveys shown that identical welfare services, such as care for the elderly, can vary in cost quite dramatically across Sweden. This reflects the high variation in how effectively public money is spent.

There are two important reasons for why the average Swedish worker pays the majority of his or her income in taxes, without necessarily receiving an equally high level of welfare.

Firstly, much of the money is spent on administrative costs in various levels of government. Although a small nation, Sweden has over a hundred public authorities. Vast sums are spent on political projects which fall outside the framework of general welfare. For instance, it is not unusual for Swedish municipalities to fund bowling alleys, swimming pools, or campsites.

Secondly, the combination of high taxes, a rigid labour market and generous welfare benefits has led to a large fraction of the population living off benefits rather than working. Even before the economic crisis hit Sweden for example, almost one out of five children in Sweden’s third largest city, Malmö, were living in a family supported by social welfare.

There are 105 local districts in Sweden in which the majority of the population live off various public benefits rather than work. This unintended consequence of the welfare state has taken a heavy toll on public services, since an increasing share of tax revenue must be diverted to fund welfare payments, rather than social services.

Many of these districts are immigrant-dense neighbourhoods, reflecting the fact that even highly educated immigrants tend to become dependent on welfare in Sweden. Others are situated in the northern part of Sweden, where many cities with stagnating economies suddenly experience a boom in the fraction of the population who cannot work due to disability.

The famous Swedish welfare state has to a large extend been consigned to the history books. Many feel that the glory days of the welfare state occurred during the end of the 1950s and early 1960s, when Sweden successfully combined welfare policies with an expanding economy. At that time however, Swedish taxes were 27 percent of GDP, compared to 47 percent today. The halcyon days of Swedish welfare did not coincide with the high tax regime we know today.

How was Sweden able to fund a prospering welfare system with relatively low taxes in the past? As the researcher Erik Moberg documents in a book he wrote for for the Ratio Institute, public money was spent much differently back then. A greater share of public revenues were spent on health care and education at the end of the 1950s compared to today.

Today on the other hand close to three times as much public revenue is spent on public bureaucracy. Four times as much is spent on welfare payments and social insurance. As the level of taxation has increased, so too has the share of taxes set aside for public bureaucracy and various government handouts.

The historical comparison with the 1950s and 1960s is worth thinking about. It shows that a high quality of welfare can be achieved with a much lower tax level than today. If politicians slim down public bureaucracy and cut wasteful spending, resources can be opened up for increasing welfare and reducing taxes at the same time. If the system to a greater degree rewards work rather than living off the state, fewer will be dependent on public funds for their daily living, again opening up for better use of tax revenues.

Sweden has long been a small homogeneous country, with a high degree of economic equality. Strong norms related to work and responsibility made it possible to enact an effective welfare system early on. With time however, welfare dependency has eroded the very norms that formed the foundation of Swedish welfare and wasteful spending has increased.

Many important social outcomes that the welfare state aims to address, and for which Sweden is famous — such as a low crime rate — have in fact increased in latter decades, concurrent with the expansion of the welfare state. Even income inequality has increased in Sweden compared to for example the 1980s, despite similar or higher public expenditure.

Today, Swedish decision makers are doing their best to reduce public spending and lower taxes. The reforms have been highly successful so far. As taxes have decreased from 57 percent of GDP in 1989 to 47 percent of GDP in 2009, the incentives to work have improved, with Swedish growth rates benefiting. This convergence to a more normal level of taxation is likely to continue in Sweden. After all, experience has made it quite apparent for many Swedes that unusually high taxes are not the key to qualitative welfare services and a well functioning society.

Nima Sanandaji, President of the Captus think tank and fellow of the Swedish Taxpayers Association

Robert Gidehag, president, Swedish Taxpayers Association

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