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TAX

The paradox Sweden’s ‘lower’ taxes – explained

Tax cuts have long been the hallmark of Sweden's Moderate Party. Why then, is the party no longer campaigning on a promise to reduce taxes further? Liberal commentator Nima Sanandaji explains.

The paradox Sweden's 'lower' taxes - explained

The Swedish election debate continues along a predictable, slightly boring, track. Except of course that a major transformation has occurred. The Moderates are no longer campaigning on the promise to reduce taxes; historically their most important issue. These days Anders Borg boasts about the fact that public expenditure has remained steady at somewhat over 50 percent of GDP since the 2006 election. How does this historical shift make sense?

Economically, it really doesn’t. Consider the situation if you are a Swedish wage earner paying the highest marginal tax rate, colloquially referred to as “värnskatt” in Swedish, which applies to income over 591,600 kronor ($92,300). If you earn 50,000 kronor a month, you actually cost your employer around 66,000 kronor per month, as the company must pay the state a 32 percent employer's fee over and above your salary.

Put another way, it costs a company 132 kronor to pay you 100 kronor in salary. That 100 kronor is then reduced by a municipal tax of 32 percent and a state tax of 25 percent, leaving you with 43 kronor. Subtract from that the average consumption tax of 21 percent charged on top of the price of goods and services and you are left with around 36 kronor, a mere 27 percent of the 132 kronor it actually costs to employ you. The other 73 percent of the sum, 96 kronor, ends up in the state's coffers. Perhaps not the greatest economic incentive for work?

Researchers and government experts are well aware of the fact that taxes tack up on each other, and that the true tax rates in Sweden are considerably higher than the visible taxes. This is why the government concluded in a recent report that the "highest current marginal tax wedge on income is roughly 73 percent in Sweden".* In the same report, government experts acknowledge that the high level even defies the very purpose of taxation. If the marginal tax were to be reduced, it would making working more economically attractive. So much so that the effect would be that as much, or even slightly more, taxes would be collected at a lower rate. The same conclusion has also been reached by other researchers.

In some countries, only a small handful of taxpayers pay the maximum rate. In Sweden, around one tenth of full-time workers reach that level. Even those with lower incomes often pay an effective total marginal tax rate of around 50 percent. So one might think that at least one of the two major political parties would campaign on reducing the level of taxation. But whilst Social Democrats actually want to increase the highest marginal tax rate – something expected to reduce public revenues – the Moderates are happy with status quo.

Although this situation might be puzzling, it makes perfect political sense. The reason is simply that politicians have hidden the true level of taxation. In 1903, Italian economist Amilcare Puviani predicted the development of modern welfare states by noting that politicians would hide the cost of the state whilst drawing attention to its benefits. Sweden's development has proven him quite right.

In the mid-1960s, Sweden was a country with a tax rate around 30 percent, one of the highest living standards in the world, and good welfare. But over the years, the situation changed. by the end of the 1980s, taxes had reached more than 50 percent of the economy. But the visible taxes, those that the citizens can see being levied on their wages, remained constant at around 30 percent. The entire shift towards a high tax state was explained by massive rises in hidden taxes, or more precisely the employer’s fee and the VAT. Consecutive Social Democratic governments had effectively hidden the real tax rate.

When the centre-right government came to power in 2006, they gradually began lowering the tax level – but making the mistake on focusing on the visible rather than the hidden taxes. And they made no efforts to make the indirect taxes more visible. Today Sweden has a seemingly low tax level. Although the true tax level remains quite high. And thus it makes little political, but very much economic, sense for the Moderates to move away from the idea of reducing taxes.

*NOTE: To be a little technical, the reason is that the employer’s fee, although the name suggests otherwise, is effectively a tax that burdens the employee. The employer’s fee is, in a very complicated way, connected to benefits in the social security system for the worker, not least in terms of higher future pensions. However, a high wage earner who earns slightly more is burdened by the employer’s fee without getting additional benefits in the social security system.

Nima Sanandaji, a Swedish writer of Kurdish origin with a PhD in polymer technology, has written numerous books and reports about subjects such as integration, entrepreneurship, and women's career opportunities. His recent book, published by Sweden's Reforminstitutet think tank, is entitled Krympande eller växande städer ('Shrinking or growing cities'). He is a regular contributor to The Local.

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WORKING IN SWEDEN

CHECKLIST: Here’s what you need to do if you move away from Sweden

What authorities do you need to inform before you leave, are you liable to Swedish tax and how can you access your Swedish pension? Here's a checklist.

CHECKLIST: Here's what you need to do if you move away from Sweden

Tell the relevant authorities if you’re leaving for more than a year

If you’re planning on leaving Sweden for more than a year, you will have to let the authorities know. The main authorities in question are Skatteverket (the Tax Agency) and Försäkringskassan (the Social Insurance Agency).

Försäkringskassan

You have to tell Försäkringskassan when you leave so they can assess whether or not you still qualify for Swedish social insurance. As a general rule, you aren’t eligible for Swedish social insurance if you move away from Sweden, but there are exceptions, such as maternity or paternity benefits if you’re moving to another EU country.

This also applies to any family members who move with you – any over-18’s should send in their own documentation to Försäkingskassan about their move abroad. If you’re moving abroad with anyone under 18, you can include them in your own report to Försäkringskassan.

If both legal guardians are moving abroad together, both need to include any children in their application. If one legal guardian is moving abroad and the other is staying in Sweden, you need the guardian staying in Sweden to co-sign your application. If you are the sole legal guardian of any under-18’s travelling with you, you don’t need any documentation from the other parent.

You can register a move abroad with Försäkringskassan on the Mina sidor service on their website, here (log in with BankID).

Skatteverket

If you are moving abroad for a year or longer, you also need to tell the Tax Agency. This also applies if you were planning on moving abroad for less than a year but ended up staying for longer.

If you move to another Nordic country, you will also need to register your move with that country’s authorities if you will be there for six months or more. You’ll be deregistered from the Swedish population register the same day you become registered in another Nordic country’s register.

This doesn’t mean that you’ll lose your personnummer – you’ll still be able to use it if you ever move back to Sweden – but you will no longer be registered as resident in Sweden.

Similarly to Försäkringskassan, you will also need to report any children you are bringing with you, and both legal guardians must sign the form, whether or not both guardians are moving abroad or not.

In some cases, you may still be liable to pay tax in Sweden even if you live abroad – particularly if you are a Swedish citizen or have lived in Sweden for at least ten years. This could be due to owning or renting out property in Sweden, having family in Sweden, or owning a business in Sweden.

You can tell the tax agency of your plans to move abroad here.

Contact your a-kassa, if relevant

If you are member of a Swedish a-kassa (unemployment insurance), make sure you tell them that you’re leaving the country. As a general rule, you have unemployment insurance in the country you work in, so you will most likely have to cancel your a-kassa subscription.

If you are moving to another country with the a-kassa system, such as Denmark or Finland, it may pay to wait until you have joined a new a-kassa in that country before you cancel your membership in Sweden.

This is due to the fact, in some countries, you only qualify for benefits once you fulfil a membership and employment requirement. In Sweden and Denmark, you must have been a member for 12 months before you qualify. In Finland, the membership requirement is 26 weeks.

If you qualify for a-kassa in Sweden before you leave the country, you may be able to transfer your a-kassa membership period over to your new a-kassa abroad and qualify there straight away, but this usually only applies if your period of a-kassa membership is unbroken.

Check what applies in your new country before you cancel your membership in Sweden – your a-kassa should be able to help you with this.

Contact your union, if relevant

Similarly, if you are a member of a Swedish union or fackförbund, let them know you’re moving abroad.

If you’re moving to another Nordic country, they might be able to point you in the direction of the relevant union in that country, if you want to remain a member of a union in your new country.

If you’re moving to another EU country, you may be able to remain a member of your Swedish union as a foreign worker with the status utlandsvistelse.

If you chose to do this, you will usually pay a lower monthly fee than you do in Sweden, and they can still provide assistance with work related issues – although it may make more sense to join a local union in your field with more knowledge of the labout market.

If you don’t want to be a member of a union in your new country and don’t want to be a member of a Swedish union, you should contact your  union and ask them to cancel your membership.

Collect relevant documents regarding your Swedish pension

If you have worked in Sweden and paid tax for any length of time, you will have paid in to a Swedish pension. You retain this pension wherever you move, but you must apply for it yourself.

To do so, you will need to give details of when you lived and worked in Sweden, as well as providing copies of work contracts, if you have them. If you have these documents before you leave Sweden, make copies so that you can provide them when asked.

If you move to the EU/EES or Switzerland, you may also have the right to other, non-work based pensions, such as guarantee pension for low- or no-income earners, or the income pension complement (inkomstpensionstillägg).

Currently, you can receive your Swedish pension once you turn 62 – although there is a proposal in parliament due to raise pension age to 63 for those born after 1961 from 2023, so this may change.

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