Does Sweden's tax system really screw the rich?

Catherine Edwards
Catherine Edwards - [email protected]
Does Sweden's tax system really screw the rich?
Sweden is one of the world's most billionaire-dense nations, so is the Swedish tax system really so tough on the wealthy? Photo: Claudio Bresciani / TT

People tend to believe two things about Swedish taxes: firstly, that they are extremely high and, secondly, that Swedes pay them readily because of the high level of public services they receive in return and their commitment to the welfare state.


A Guardian headline from 2008 proclaims: 'Sweden: Where tax goes up to 60 per cent, and everybody's happy paying it'. An opinion piece for Vox that regularly does the rounds on social media has the title: 'I'm an American living in Sweden. Here's why I came to embrace the higher taxes.'

It's true that Swedes report a high level of satisfaction in the country's public services, and even the Tax Agency itself enjoys a good reputation. According to a 2017 poll by Kantar Sifo, the Tax Agency has the fifth best reputation of Sweden's 29 public authorities, scoring highly on categories such as accessibility.

But unsurprisingly, not everyone is delighted to hand over a hefty portion of their wage packet to the taxman.

A woman fills out her tax return -- these days the procedure is often done online. Photo: Fredrik Sandberg/SCANPIX/TT

Investigations such as the Panama Papers and Paradise Papers revealed how some of Sweden's wealthy keep their money abroad, avoiding the high tax rates in their home country. In 2016, the former leak revealed that around 400 Swedish individuals and businesses were stashing money in offshore tax havens, and last November, the Paradise Papers showed that some high-profile Swedish entrepreneurs had stored their wealth in offshore funds and tax havens.

One of them, Leif Östling, resigned from his position as chairman of Sweden's largest business federation, the Confederation of Swedish Enterprise (Svenskt näringsliv) over the ensuing row. Although not suspected of any legal wrongdoing for keeping stocks worth millions of kronor in a Maltese company, Östling was forced to backtrack after controversial comments in which he labelled Swedish taxes as "insanely high" and asked: "What the hell do I get for the money?" He later clarified this, praising Sweden for its "generally functioning welfare system", but added that he benefited relatively little from this compared to the amount he paid in.

As of December 2017, the country is home to 184 billionaires (measured in Swedish kronor), an increase of eight from the previous year and more than four times as many as 20 years ago. They own a combined wealth of 2,140 billion kronor, or around half of the country's GDP. That number pales in comparison to the US, where two fifths of the world's dollar millionaires reside, but Sweden is much smaller and has a very high number of extremely rich people per capita, as multiple studies show. 

Leif Östling. Photo: Tomas Oneborg / SvD / TT

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In 2017, it was home to 335,000 millionaires, the Credit Suisse Global Wealth Report showed, up from 280,000 the previous year -- the tenth biggest year-on-year change worldwide -- and putting it 16th in the world. According to the Sunday Times Rich List, in 2017 two Swedish families - Stefan Persson, Lottie Tham & family and the famously frugal Ikea founder Ingvar Kamprad and family -- were among the 15 richest in Europe. And in Forbes' list of dollar billionaires, published earlier last year, over half of the 58 entries from the Nordics hailed from Sweden.

So with so many wealthy people calling it home, is Sweden really so hard on the rich?

While Östling is an entrepreneur, many of the names in Sweden's rich list boast family fortunes, including the heirs to global brands such as H&M, Ikea, and Clas Ohlson. It's important to note than Sweden's tax system treats inherited wealth and earned wealth very differently. In his public statement, Östling stressed that over the past seven years, he had paid 84 million kronor in income tax and 23 million kronor in capital gains tax in Sweden. Indeed, for high earners, income tax swallows up over half of their salary.

Ikea founder Ingvar Kamprad, one of the world's richest people. Photo: Björn Larsson Ask / SvD / SCANPIX/TT

But top earners in Sweden benefit not only from high levels of public services but also from the fact that several categories of tax simply don't exist in the Scandinavian nation.

Property tax was scrapped in Sweden over a decade ago. Now, instead of facing taxes -- which in the US, for example, vary significantly from place to place and tend to go up each year -- property-owners instead pay a much lower fixed fee, equivalent to 0.75 percent of the property's taxable value but currently capped at 7,412 kronor each year.

Inheritance tax and gift tax, having existed in the Nordic country since the 1600s in various forms and reaching a high top rate of 70 percent in the 1980s, were totally abolished by a unanimous vote in the Swedish parliament in 2005. According to a government statement at the time, the decision was made "for reasons including improving conditions for running a business,[...], which will facilitate generational succession".

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Taxes on inheritance and gifts -- the latter often being given in order to circumvent tax on the former -- were complex and costly to administer. They also caused complications when the majority of an inherited estate's value was tied up in a business or property, forcing many heirs to sell family homes or businesses to stump up the cash for the tax, in some cases leading to their bankruptcy.

Together, these taxes had generated less than 0.2 percent of all tax revenue in their final year of existence, so getting rid of them acted as an incentive for entrepreneurs to keep their businesses and capital in the country without meaning much of a loss in tax revenue.

The scrapping of these taxes had a huge effect on Swedish society. According to a study published in The Journal of Socio-Economics, people actually appeared to postpone dying in cases where there was a tax incentive for them to do so. Inheritance tax was repealed for surviving spouses from January 1st, 2004 and scrapped altogether exactly one year later, and administrative data showed that people with tax incentives to die the day following the repeal, rather than the day before, were significantly more likely to do so than those with no such incentive. 

File photo: ArturVerkhovetskiy/Depositphotos

Anders Ydstedt, who has written the book 'Ten years without the Swedish inheritance tax Mourned by no one – missed by few' tells The Local: "These reforms got rid of the most dangerous taxes to the system. They were smart reforms; in the ten years since they were abolished, tax revenue has gone up in Sweden while the tax-to-GDP ratio has fallen."

He notes that taxes on wealth and inheritance led to an "exodus" of money and talent from the country. Abolishing them, he says, "was a symbolic move that showed Sweden is not punishing success or entrepreneurs, which builds the trust needed for entrepreneurs to stay in Sweden."

Businesses were forced to invest time and effort into planning how to cope with these taxes, and many entrepreneurs left the country altogether, taking their ideas, capital and jobs with them, to avoid being hit by these taxes later on. Tetra Pak founder Ruben Rausing, IKEA founder Ingvar Kamprad and industrialist Fredrik Lundberg were just three high-profile emigrees, with Lundberg citing tax policy as the main reason for his move to Switzerland, but returning to Sweden after inheritance and wealth tax were lowered. Like inheritance tax, wealth tax was scrapped in 2007, when Sweden was only one of five OECD member countries to still have the tax. 

Kamprad returned in 2014, and in the same year, Finnish bank boss Björn Wahlroos made headlines across the Nordics when he moved to Sweden, citing the scrapping of gift and inheritance tax as one key reason.

Sweden's tax rates were an incentive for the Finnish bank boss. Photo: Magnus Hjalmarson Neideman / SvD / TT

Ydstedt describes multiple positive results of the reform in his book, from time saved in businesses increasing productivity to a drop in Sweden's tax-to-GDP ratio.  This ratio declined from 51 percent of GDP in 2000 to 44 percent in 2014, even as tax income increased by 260 billion kronor (adjusted for inflation).  

However, Sweden still has a long way to go if it is to offer a competitive tax climate to entice entrepreneurs who have the possibility of working anywhere. It's making progress, having dropped from having the highest tax-to-GDP ratio in the OECD to its 2016 ranking of fifth, but remains well above the OECD average of 34.3 percent. Compared to the average across the 35 countries, Sweden has lower taxes on property, corporate income & gains, and social security contributions, but higher taxes on personal income, profits & gains, and payroll taxes. 

The next area it should look to reform, Ydstedt says, is income tax. "We probably raise less in tax because of the high margins which remove incentives for people to work more hours or get educated. That probably means we get a lower total tax revenue."

"In a globalized world, there are fewer borders both for capital and for talent, so we need a good, competitive tax climate. There's still a lot to do, particularly for skilled people."

Office blocks in Sergels Torg, central Stockholm. Photo: Henrik Montgomery / SCANPIX

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There are two parts to Sweden's income tax. The first of these, national income tax, is only paid on annual income over a certain amount -- this is adjusted slightly each year and was 439,900 (roughly $53,685) for the income year 2017. On taxable income between 438,901 kronor and 638,500 kronor (roughly $77,900), you pay 20 percent in national income tax, which rises to 25 percent over 638,500 kronor.

The actual amounts you would have to earn to pay these tax rates are 452,100 and 651 700 kronor (roughly $55,185 and $79,535) respectively, due to the basic deduction (the amount which workers are eligible to earn tax-free). The rates vary slightly from year to year -- in 2016, they were 430 200 kronor and 625,800 kronor respectively -- and that anyone aged over 65 at the start of the tax year benefits from a higher basic deduction as a pensioner.

On top of this high rate state income tax comes local income tax, paid on all annual income over 18,800 kronor (roughly $2,295). These rates also vary year to year and depend on where you live, but in 2017 and 2018 the average is roughly 11 percent in county tax and 21 percent in municipality tax, making a total of 32 percent. The exact rate varies by more than five percentage points: in 2018, the total local income tax ranges from 29.19 percent in Vellinge, Skåne to 35.15 in Dorotea, Västerbotten County in the north.

So on average, those in the highest earnings bracket will pay 56 percent of their taxable income to the taxman (31 percent in local income tax plus 25 percent in national income tax), but a top earner living in Dorotea would pay 60.15 percent. A Swede on the national average annual salary, according to SCB, of 393,600 kronor (roughly $48,000) would pay only the local income taxes, of around 31 percent.

The majority of IT professionals fall into the top tax bracket. File photo: Henrik Montgomery / TT

But figures from the Confederation of Swedish Enterprise show that in 2018, more than 1.4 million Swedes (around 14 percent of the country's population and one in three full-time workers) will pay the marginal tax of around 51-56 percent. This figure has increased by 360,000 since 2014, and means that this year, 38 percent of nurses and 42 percent of police officers will pay marginal tax, up from 22 percent and 29 percent respectively four years earlier.

"Everyone with a full-time job in Sweden pays at least 31 percent in local income tax, and the highest marginal rate kicks in at a relatively low income. So you get police officers and teachers, for example, paying over half their income in tax," Christian Ekström, CEO of the Swedish Taxpayers' Association, which advocates for lower taxes and to tackle waste in tax money, tells The Local.

"Income tax is really problematic in Sweden. The current system makes it less worthwhile to study, work longer hours or educate yourself, which would help the economy grow. So it affects all parts of society, not just the people who pay them," he says. "The current system is better than it has been in the past, but it doesn't aid meritocracy -- it's more profitable to own things than to work for them, so if you're born rich it's OK but it's harder to move up the ladder and go from rags to riches.

"If we cut the top tax rate, the state would actually get more money because there would be an incentive to work more. If you look at Germany, their tax rate is around 15 percent lower and they still have great healthcare and roads." 

Taxpayers in Sweden know that a chunk of that money finances highly-subsidized healthcare. Photo: Isabell Höjman / TT

Sweden has the highest top marginal tax rate in the OECD, followed by Denmark, Japan, Austria, Finland, and the Netherlands, where the top rate is all above 50 percent. The average rate across all 35 OECD countries is around 40 percent.

This is exacerbated by the fact that Sweden has one of the lowest thresholds for paying that top rate. Sweden's top three OECD trade partners, Germany, Norway, and the USA, all have at least a 13 percent lower top tax rate, and residents must earn the equivalent of 300,000 kronor more to reach this rate than their peers in Sweden.

Yet while the income tax system is tough on high earners, Jesper Roine, an Associate Professor at the Stockholm School of Economics, points out that the low threshold for the top rate makes life easier for the very rich.

"Whereas in other countries, it might just be the top one percent paying the top rate, in Sweden it's more like the top 15 percent," he tells The Local. So once a high earner reaches the threshold for paying the top rate, they won't be penalized further for earning more.

"It's true that Sweden is a high tax country, but the standout feature of Swedish taxation is not the tax on high earners, but the fact that the majority of society pays very high taxes," says Roine. "And high earners still benefit from things like higher education or childcare, which in the US or UK would be a big chunk out of your earnings."

Meanwhile, the economist says that while those whose wealth comes from their wages face high taxes, those whose wealth comes from capital gains (such as profit on stocks, bonds, or other assets) have "no real reason to complain". As well as the lack of taxes on property, wealth, and inheritance, capital gains tax is flat at 30 percent, whereas many countries have a progressive tax on capital, meaning that the rich face a higher rate. 

File photo: Emma-Sofia Olsson / SvD / TT

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Johan Lidefelt is one of the authors of 'A challenged Sweden: Talent hunt and marginal tax', in which he puts forward proposals for reforms to the tax system. Currently, he says, Sweden is "an outlier in a negative way" on income tax.

Explaining why Sweden's top tax rates are so high, he points out that during the '70s and '80s they were even higher, peaking at almost 90 percent, and says this is due to the fact that Sweden was historically dependent on its big industrial companies, which dominated Swedish industry. Recent decades have seen entrepreneurs and small businesses play an increasingly important role, however, and he says that there has been a series of positive reforms aimed at creating good environments for entrepreneurs over the past ten years.

"We have the lowest premium on higher education of all OECD countries, meaning those who go through higher education are taxed very, very highly so it benefits them less. That discourages effort, education and hours worked, and this effects how people educate themselves and ultimately how they work. 

"Meanwhile, the income from state income tax is only three percent of total tax revenue. We think that by lowering the top rate, and increasing the threshold to reach this rate, more taxes would be recuperated from more hours worked."

The proposals include a reduction of state income tax from 25 to ten percent, and changing the threshold for this top rate to a monthly income of 80,000 kronor, equivalent to 960,000 kronor (roughly $117,750) each year. This would bring the top tax rate much closer to the OECD average, and Lidefelt says the income distribution would only be slightly affected.

"When we did simulations to look at the behavioural effects of such a reform, we found that it would almost entirely self-finance. People would work more hours and with more effort, leading to higher productivity because you'd be rewarded more for working more."

As for how likely it is that reforms in line with his proposals would ever be introduced, Lidefelt says he is optimistic in the long term, but that the discussion needs to change from focussing on the short-term effect on the budget to long term effects on GDP and productivity.

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