The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Sweden published on 3rd December 2008.
In recent years, Sweden has implemented ambitious tax cuts aimed at boosting growth: it used to have the highest tax-to-GDP ratio in the OECD, but it is now starting to edge down the list. This process should continue, in parallel with spending restraint. The recent OECD Tax and Growth study found corporate income taxes to be the most distortive, followed by personal income taxes and then consumption taxes, with housing taxes being the least inimical to growth. Against this background, the envisaged reduction in the corporate tax rate from 28% to 26.3% in 2009 is sensible. Continued gradual reductions of corporate income taxes and the recent abolition of wealth taxes improve Sweden’s attractiveness in the context of growing capital mobility. By contrast, lower employer contributions for small and medium-sized companies, as sometimes discussed, risk impeding their growth and would distort competition.
Total tax revenue compared internationally, % of GDP
Further reforms are needed as regards personal income taxation. The total marginal tax wedge (contributions, income and consumption taxes combined) still rises to 70%, beginning not much above average full-time earnings and affecting a third of the full-time employed. Such a high marginal tax wedge is probably part of the reason why average working hours are short, and it is not conducive to entrepreneurship, human capital formation or retaining and attracting highly-skilled staff from abroad. It is therefore encouraging that raising the income threshold for the state income tax, as proposed in the previous Survey, is now being considered. Based on detailed models, it has been estimated that the ensuing dynamic effects in terms of labour supply would be larger than from expanding the in-work tax credit. The case for reducing the state income tax would be even more compelling if the effects on human capital formation and international mobility were taken into account.
As these effects are likely to become more important, it is essential to find pragmatic ways to continue to reduce the state income tax. It brings in revenue of just 1.3% of GDP; even large reductions would be relatively cheap when dynamic effects enlarging the tax base are factored in. Such cuts are often contested as the state income tax is one of the few remaining elements creating progression in the Swedish tax system. However, equity is better served by policies to promote learning outcomes for children of all backgrounds and to widen labour market inclusion than by retaining very high marginal taxes for high-income earners or the wealth tax which was recently abolished. Moreover, there would still be ample redistribution in the form of publicly-funded services like child care available to all and relatively generous social security. A socially acceptable – and efficient – approach could be to further move up the threshold from where the state income tax is paid. At some point, consideration should also be given to reinstating Sweden’s well-functioning housing tax of 0.7% of each owner-occupied home’s market value, which was replaced by a capped municipal fee in 2007. This would boost redistribution in a growth-friendly way.
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. A Summary in Swedish (pdf format) is also available.
The complete edition of the Economic survey of Sweden 2008 is available from:
For further information please contact the Sweden Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Jens Lunsgaard and David Turvey under the supervision of Vincent Koen. Research assistance was provided by Roselyne Jamin.