Sweden to slash income taxes to stimulate savings and economy

Sweden has joined the global push, spanning ideological boundaries, to cut tax rates in order to stimulate individual productivity, curb inflation, and bolster economic growth. Notorious for having the world's highest taxes, Sweden recently announced that it would slash personal income tax by as much as 50 percent for large numbers of Swedes. Guidelines for the tax overhaul, approved last week by the ruling Social Democratic Party, are slated to become law in 1991, though many of the details are still being worked out.

``Our tax system is crumbling,'' said Swedish Finance Minister Kjell-Olof Feldt, in a speech to the parliament. Calling the system ``perverse,'' he noted that high taxes had led to rampant tax evasion, lower savings, and increased borrowing.

``This is a reversal of traditional Social Democratic tax politics,'' says Carl Bild, leader of the opposition Conservative Party, who applauds the move but warns against increases in other areas of taxation.

Critics are quick to point out that even after the reform, Sweden is likely to continue to shoulder the world's heaviest tax burden. The government plans to recoup the loss of $10 billion in personal income tax receipts by boosting indirect taxes $8 billion. Another $2 billion will be recovered through an expected additional 1 percent economic growth from the tax cut.

The Social Democrats also plan to sharpen taxation on financial income and capital gains, and to expand the value-added tax (VAT) - currently 23.46 percent on everything from food to the kitchen sink - to include newspapers, television licenses, charter travel, movie tickets, telephone bills, and water. And, in a tough blow to homeowners, they will pull the carpet out from under a generous 50-percent interest deduction on all personal loans, cutting them to 30 percent.

The key question is: will Swedes change their patterns of behavior as a result of the reform? Will they have greater incentive to work? Will they stop borrowing and start saving more? Most analysts have adopted a wait-and-see attitude.

``It's too early to tell,'' says Peter Stein, an economist at the Swedish Free Enterprise Foundation and doctoral candidate at the Stockholm School of Economics. ``In the final analysis, we don't really know what this proposal amounts to. We see bits and pieces of it, but we're still not clear whether it is to be implemented item-by-item or as a coherent package.''

Some aspects of the tax reform, however, are clear.

Swedish workers who earn less than $26,000 per year - some 90 percent of Sweden's workers - will have their national income tax reduced to zero and pay 30 percent municipal tax.

Swedes currently pay combined municipal and state taxes of about 45 percent. The top tax rate would fall to 60 percent from 75 percent.

This is good news for Swedes, especially those with high incomes and low deductions, says Staffan Andersson, a senior tax partner at Price Waterhouse in Stockholm.

He adds that the group to benefit least would be average wage earners with high loans, which includes many Swedes.

A Swedish worker earning $33,000 a year or more, currently faces a stunning marginal, or peak, income tax rate of 75 percent to pay for the country's generous welfare system. Under the tax proposal, this rate would be cut to 60 percent by 1991.

Many Swedes have resorted to a series of legal, semilegal, and illegal devices to reduce the tax burden. Many form their own paper companies, which report annual losses and write these off against income tax. Others simply work ``off the books'' or trade services with each other instead of cash. This is the sort of behavior the tax proposal aims to stop.

But longtime observers question whether the changes will be enough. ``It doesn't go far enough,'' says Peter Stein, who recently published a paper entitled ``Sweden: Failure of the Welfare State'' in the US-based Journal of Economic Growth. Says Mr. Stein, ``Mr. Feldt's praiseworthy but modest proposal will not suffice to make Sweden, the outsider, competitive enough to be a winner in the 1992 races.''

Stein is, among other things, referring to a drive by the European Community (EC) to create an internal common market by 1992. Sweden is not an EC member due to its stance on political neutrality, but has been actively discussing joining. It would likely be, however, a major problem to integrate Swedish taxes with a tariff-free market.

``There's no question that we've felt pressure to bring our taxes in line with the rest of the world,'' says Price Waterhouse's Mr. Andersson.

Adds Stein, ``While other countries have been privatizing and deregulating, Sweden has pursued a course in exactly the opposite direction.''

He notes that during the 1960s and 1970s, a time when Sweden was hailed as the ``middle way'' - an ideal mixture of socialism and capitalism - that this was simply not the case. He says people confuse Sweden's robust growth, second only to Japan, with the 1970s and 1980s, in which Swedish growth fell 20 percent below the average for EC nations.

``People have missed this point. Now, they're beginning to realize that the cumulative effect of Government intervention has adversely impacted individual freedom, private initiative, and productivity,'' Stein says.

Considered one of Sweden's ``new pragmatists,'' Finance Minister Feldt is praised both for the tax-cut's general direction and for quietly rounding up the necessary support within the ranks of the Social Democratic Party for reform measures.

The latter was a formidable feat since the Social Democrats, who have ruled Sweden for all but six of the past 55 years, have made high taxes a center plank in the party platform.

Swedes have accepted that high taxes are needed to pay for everything from dentist bills and health insurance to day care and pensions. But this attitude is changing. Said one Swedish taxpayer, ``Even if overall taxes remain the same under the new proposal, at least it will be wage earners, not politicians, who determine where that extra money in their pockets is spent.''