Some issues related to the equity-efficiency trade-off in the Swedish tax and transfer system
Economics Department working paper 225.
The Swedish universal welfare model relies on a high tax level to finance a variety of transfers to the working-age population both in the form of income replacements and income supplements and as services for health-, child- and elderly care. The available evidence, reviewed in this Working Paper, indicates that the system has powerful redistributive properties. However, the efficiency costs of the system are substantial. Taxes and benefits combine to face income earners with high effective tax rates and the unemployed with little reward from moving into employment, resulting in a declining intensity in the utilisation of labour. A complex tax code arising out of a significant difference in tax rates for labour and capital income impedes the establishment and expansion of enterprises. An internationally-high taxation of capital income acts as an impediment to savings and the development of the domestic market for risk capital. To these domestic distortions has to be added the detrimental effects of high taxes due to the increasing international mobility of capital and skilled labour. The Paper reviews options for reform based on utilising differences in sensitivity of tax bases (optimal taxation approach) or on a greater uniformity of tax rates (a more proportional tax system), with a view to lowering of the overall tax level, particularly on labour, and alleviating some of the negative features of capital income taxation. It also sets out an approach to social insurance reform, which should encompass lower replacement rates, a review and reinforcement of eligibility criteria and a greater reliance on arrangements with risk-differentiated premiums.
Long abstract
