Friday, December 01, 2006

It's Not That Bad In Sweden

As usual, when he discusses non-monetary issues, Alan Reynolds latest column was good and interesting.

Except that -with the risk of being regarded as nitpicky- he overestimated just how bad (i.e. socialist) things are in Sweden. He claims, quote:

"Ordinary Swedish workers face a payroll tax of 40 percent, a national and local income tax of at least 50 percent in Stockholm (the rich pay 5 percent more) and a 35 percent value-added tax on everything they buy."

Actually, the payroll tax is "merely" 33%, the general value added tax is "merely" 25% (It is lower on some items like food and news papers, but higher on alcohol, tobacco and gasoline). The marginal income tax for most workers is actually just 31.5% (differes between different Swedish municipalities, generally somewhat lower than that in the Stockholm area and some Southern Swedish areas, but higher in northern Sweden. Workers earning above-average income also pay a 20% extra tax to the central government in Sweden . And workers which is considered particularly well-off, they pay an additional 5% of their income).

While is indeed far too socialist (social democratic), it's not really as bad as Alan Reynold's claim it is.


Blogger Alan Reynolds said...

Absolutely right about the 25% VAT -- my mistake. My source on payroll and income tax was PriceWaterhouseCoopers.
They say there is a pension fee of 7% in addition to Social Security charge of 32.7%. They also say municipal income tax is 29-37%, while the national rate is either 20% or 25%. Decutiblity of one tax against another affects the net rate (a fourth of the pension fee is deductible, for example). But the payroll and income tax rates look worse than Stefan says. I may indeed be missing something, however. My main point is that the Swedish tax system is far less "progressive" (and more pro-business) than U.S. egalitarians believe.

4:10 PM  
Blogger Alan Reynolds said...

You're right about the VAT -- I'll correct that.

There is a 7% pension fee (one-fourth deductible) in addition to the 32.7% payroll tax. Price Waterhouse Coopers says national income tax is either 20% or 25%, with flat municipal tax of 29-37%. Even with deductibility of one against the other, it's hard to get that down to 31.5% at the margin (as opposed to average). What am I missing here?

My main point is that the tax system is virtually proportional rather than "progressive," and relatively low at the corporate level. U.S. admirers of Sweden, like Paul Krugman, always neglect to mention that. But Old Stockholm is lovely.

4:16 PM  
Blogger stefankarlsson said...

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6:30 PM  
Blogger stefankarlsson said...

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11:41 PM  
Blogger stefankarlsson said...

Alan, the 7% "pension fee" was originally applied as an extra income tax during a pension reform in the 1990s. However, in the last few years, the Social Democratic government have made more and more of it deductable and now we get a tax reduction equivalent to the entire pension fee.

So, in other words, the payroll tax have never (not in recent years anyway) been higher than 32.7%.

The flat municipal income tax does indeed vary between about 29% to 37%, but the weighted average is only 31.5% because taxes are the lowest in municipalities with the largest population, particularly in the Stockholm area.

11:41 PM  

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