A Country Where People Pay Taxes

The Swedes regularly paid their taxes even when the rates were some of the highest in the world. Yet Sweden has recently had to slash the tax burden.

Tax analysts in north-west Russia are studying Sweden’s tax system as Russia’s budget crisis necessitates the study of any workable tax system.

Sweden’s famous “socially oriented market economy” began to run into problems several years ago as a result of growing government spending and exorbitant taxes. Consequently, many foreign businesses shut down their operations and Swedish products became uncompetitive on world markets.

In 1991 the new, right-wing government decided to implement radical economic reforms, including privatizing many large enterprises, lifting restrictions on the export of capital, and dismantling administrative levers for regulating the exchange rate of the krona.

As a result of these measures, Sweden has seen foreign investments rise by two and a half times since 1992, to a total of 100 billion kronor (over US $15 billion) in 1995.

Personal tax rates (which had reached 85 %) have been lowered to levels that are comparable to those in the rest of Europe and corporate tax rates have dropped from 56 % to 28 %. The procedures for collecting value-added tax and excise taxes have also been modified. And the numerous loopholes for tax evasion have been eliminated.

Today Sweden’s corporate tax rate is one of Europe’s lowest. However, there is still work to be done since the rates of many deductions, especially employers’ social security contributions and personal income taxes, remain high.

Sweden’s fiscal authorities say that the tax burden is now comparable to that of other European countries, but they agree that employers’ social security contributions are still too high.

Unlike Russia, where numerous loopholes and tax privileges make it possible to “free” a large part of wages from tax, all Swedish incomes are taxed, including interest on deposits and yields on securities. So in Sweden one cannot economize much on tax. However, the different ways of taxing profit, capital, and incomes compel the taxpayer to transfer his finances to those arrears where taxes are less burdensome. Nevertheless, more than 90 % of all taxpayers voluntarily pay their taxes.

What particularly worries Swedes is the existence of a shadow economy in their country. In fact, in Sweden the shadow economy accounts for 4 % of GDP, compared to 40 % in Russia.

In Sweden only small trading companies that make cash transactions are involved in the shadow economy. Strange as it may seem, Swedish taxmen took a keen interest in how the shadow economy is regulated in Russia. One means of regulation is mandatory registration of cash registers with tax bodies. This measure would no doubt be more effective in Sweden than in Russia.

Realizing that violations are attributable to exorbitant taxes, Swedish economists continue to call for lower wage taxes. But it is difficult to predict how the economy would react to a lower wage tax. As for social security benefits, sharp cuts in them would affect primarily the poorest section of society. The share of social disbursements from the state budget is 23.8 % of GDP and is formed only from employers’ contributions to the treasury.

What can Russian taxmen learn from their Swedish counterparts, who work in entirely different conditions, and what can they borrow from the Swedish experience? The Swedes believe that even though the tax systems of European countries have a great deal in common, and the Russian system was created “by analogy”, it is dangerous for Russia to borrow from different legislations bits and pieces that cannot be put together. But Russian tax specialists say that their task is not to search for “a special path of development”, but to borrow the best from the tax systems of different countries.

Key terms.

1. Marginal income tax rate

2. Transfer payments and governing spending on goods and services

3. Direct, indirect, and wealth taxes

4. Public goods

5. Merit goods

6. Ability to pay

7. Benefits principle

8. Progressive taxes

9. Value added tax

10. Poll tax