Sign up for email updates!

Don't miss out on what matters. Sign up for email updates from Larson's Political Economy!

Stay informed! Sign up for e-mail updates:

Tuesday, March 26, 2019

Socialism in Sweden, Part 2

Yesterday I published my first article on the ridiculous idea, thrown around by pop-tart libertarians and opining college professors that Sweden is not at all a socialist nation, but a robustly capitalist, libertarian country. I am still scratching my head trying to figure out why Sweden has suddenly become the object of libertarian worship, but I will not spend my time trying to get inside the heads of those pundits. Let me instead explain what Sweden actually looks like. It will take a few articles, but it is worth it.

The first thing that astonishes me about many libertarian Swedophiles is that they rush to conclusions about socialism and capitalism without even trying to review appropriate data. The lack of empirical evidence is actually pervasive in their writings, which is why none of them seem to know that in 2015 (using OECD data) total government in the United States spent 37.9 percent of GDP and took in 33.9 percent in the form of taxes and other revenue.

In Sweden the corresponding numbers were 49.6 and 49.8, respectively.

In other words, in robustly capitalist, libertarian Sweden government confiscates half the economy, reshuffles it and spits it out according to its own ideological preferences.

Somehow, though, that is not supposed to be socialism.

It is, of course. Socialism, namely, is not about who owns property. I know that a lot of people, even educated ones, try to make that the case, but the fact of the matter is that socialism has nothing to do with who owns the means of production. Instead, the essence of the socialist ideology is economic redistribution - or egalitarianism. The ideological goal of socialism is to eradicate economic differences between individuals.

I am not going to delve into the details of egalitarianism, but for those who would like to know more about it, I recommend my book from last year: The Rise of Big Government: How Egalitarianism Conquered America. There, I explain in detail the egalitarian ideology behind the Swedish welfare state and how that ideology has influenced the welfare state in America.

As it stands today, Sweden is very much true to its ideological heritage, even though the original contribution upon which the Swedish welfare state was built, was published 85 years ago.

Sometimes, socialists resort to confiscation or other means of socialization of businesses - capital, for short. Once private property is reduced to a residual, and this government ownership is defended by totalitarianism, the socialist society has escalated to communism. However, it is important to keep in mind that termination of private property is not a goal in itself for socialists. It is a means to the end - which, again, is the elimination of economic differences between individual citizens. If socialists think they can achieve their ideal egalitarian society without confiscating capital, they will allow people to continue to own the means of production.

There is widespread ignorance among America's libertarians and conservatives on this issue, an ignorance they share with, e.g., their Swedish peers (as the pop-tart libertarian has clearly demonstrated). They do not understand the life blood of socialism, and they certainly do not understand its progress from welfare state to totalitarian state. I am sad to report that they share this ignorance with elected conservatives in, e.g., the United States Congress, where aloof Republicans run around with their hair on fire throwing the "socialist" label after freshman Democrats. If, instead, they - and America's libertarian pundits - decided to talk actual policy, they might make some headway in beating back socialism here in America.

Some libertarians will defend themselves by claiming that they do indeed talk about the content of socialism, which is why they reach the conclusion they do about Sweden. As admirable as they are for trying, their idea that socialism is about property rights misses the target completely.

One of its effects is actually that the libertarian pundits forget to take into account how much taxes government takes out of people's income. Property rights, as they are defined in the philosophical libertarian tradition, apply to income as well as to what we traditionally think of as property. Government has no more right to seize a share of our income as they have seizing a share of our home, our car or our bank savings. 

Speaking of which, let us take a closer look at Swedish taxes. First, some random examples of how the value added tax applies (the full list is way too long and complicated to report here; click this link if you are able to navigate a Swedish website):

  • If you want to go see a theater play you pay six percent VAT on the ticket;
  • Netflix-style streaming services are burdened with a 25 percent VAT;
  • While staying at a hotel, you pay a 25-percent VAT on car parking;
  • Taking your dog to the veterinarian? Expect to pay 25 percent VAT;
  • Museum tickets - six percent VAT;
  • Train tickets - six percent, unless you are a consultant traveling for work, then you pay 25 percent;
  • You pay 25 percent VAT on the tap water in your home;
  • All groceries come with a 12-percent VAT;
  • Have a safe box at your bank? Pay 25 percent VAT on the fee;
  • Need new glasses? 25 percent VAT.

And so on. Again, these are just some randomly chosen examples. As for the income tax, they start with a local-government income tax that is split in two: a municipal tax (kommunalskatt) and a health district tax (landstingsskatt). On average, this combined tax is 32.2 percent of your income - from the first krona you make. It is a flat rate and applies to very poor people to the same degree as it does to millionaires (not that being a millionaire in Swedish kronas is anything to write home about...). The health districts get approximately half of the tax; in other words, Swedes pay about 16 percent of their income in tax for their single-payer health care system. 

On top of the local income taxes, about one in four pay a national income tax. This tax adds 20 percentage points to the local income tax. For a tenth of the taxpayers, there is another ten percentage points added, topping out the marginal income tax north of 60 percent. This is why many higher-earning employees try to get part of their compensation through capital income, which is taxed at 30 percent. 

It is worth noting that on top of this, employers have to pay a 31.4-percent payroll tax. In other words, to make sure an employee gets 100 kronor after tax (less than $10 today, but let's use it as an example...), an employer has to pay 193.58 kronas. And that is for an employee who does not make enough to have to pay the national income tax. On the margin, in the highest tax bracket, putting 100 kronas in the hand of an employee will cost the employers 264 kronas.

Not bad for a "robustly capitalist, libertarian country"...

In fairness, you can qualify for tax deductions of all kinds. There is a standard deduction, although its profile is not straight and flat as here in America. It is phased out, creating an onerous marginal-tax effect at the bottom of the income ladder. Then there is the Swedish version of the EITC, which further steepens the marginal-tax effect (as it does here, by the way). Maxing out these deductions, a low-income Swede makes out OK compared to the actual tax rates. Using OECD data from 2017, here is a comparison between the American and Swedish tax systems for three groups of earners:
  • A single parent with two kids and an income at 67 percent of average earnings;
  • A married couple with two kids and two incomes, one at 100 percent of average earnings and one at 33 percent (the "married low" category);
  • A married couple with two kids and two incomes, one at 100 percent of average earnings and one at 67 percent (the "married high" category).
First, the average income tax rate, which again takes into account general, applicable deductions:

Average income tax rate
Single Married lowMarried high
Sweden
15.34
15.76
16.93
United States
-2.48
10.29
12.60

It is worth noting that the Swedish household does not qualify for the national income tax, which is why the Swedish tax system looks like it has a flat rate. 

Then there is something called the "tax wedge", which the OECD defines as "the ratio between the amount of taxes paid ... and the corresponding total labour cost for the employer". It is not as straighforward as the number I presented above (where 100 kronas in the hand of an employ costs the employer 193-264 kronas), but it is a business-leaning method for estimating the "discouragement" toward hiring another employee.

It turns out that in robustly capitalist, libertarian Sweden the wedge is anywhere between 1.5 and 2.7 times higher than in the United States. It is especially high for low-income workers:


Single Married low  Married high
Sweden 33.85 37.66 39.28
United States 12.74 24.50 26.48


Once again, we are talking about Swedish income earners below the national-tax threshold.

To even stay remotely competitive, Sweden has a 21.4-percent corporate income tax, but keep in mind that the VAT is a far more onerous - and costly - tax to have to deal with than American sales taxes. Several years ago, when I wrote a review of the Swedish tax system for the Center for Freedom and Prosperity, I estimated the VAT regulatory "manual" for a business to about 1,000 pages. 

Not bad for a "robustly capitalist, libertarian" country...

There are some other taxes, too. If you sell a house, you pay some 21 percent on the net value gain (after a small tax-exempt deduction). Since the only equity most Swedes leave behind is tied up in real estate, this is de facto a death tax - in other words, government did not lose much when they abolished the death tax 14 years ago. This is also why there is no wealth tax: the minute you realize your wealth by selling your house, the first guy you see when you exit the property is the tax man. 

Some people add that there is no property tax. Formally, that's true, but there is a title acquisition fee of 1.5 percent of the purchase price and two percent of the value financed by a mortgage. Furthermore, when the property tax was eliminated in 2008 local governments were given the right to levy a "property fee" instead. Which of course is not a tax, so it doesn't count, does it...? 

The property fee is constructed as a title fee, which has to be renewed annually at the cost of up to 0.75 percent of the property value. That fee, in turn, is paid out of money that has been reduced by the income tax, by the VAT and by a sophisticated system of excise taxes. 

Oh, and let's not forget the gasoline tax. It was replaced in 1995 by two taxes: a carbon dioxide tax and an energy tax. Once those taxes have been added to the gasoline price, there is also a VAT levied on top of it. Yes, the VAT is calculated on the price including the other taxes. In other words, a five-percentage point increase in the excise taxes will increase VAT revenue as well, for a total increase in the cost of gasoline by eight percent. 

Again, in total government takes half the economy, reshuffles it and spends it according to a set of ideological preferences. But no, Sweden is not socialist...

3 comments:

  1. You scorn libertarian Swedophiles. What do you think of the socialist (progressive) ones?

    ReplyDelete
  2. Thanks for all the detail. Looking forward to further articles.

    ReplyDelete

Favorites!