Sweden Reforms Tax System

INTERVIEW

SWEDEN, regarded worldwide as the ultimate welfare society, is launching a radical supply-side tax reform. ``We were supply-siders before the word was invented,'' claims Kjell-Olof Feldt, Sweden's finance minister. Supply-side economics deals with the incentives and other factors needed to encourage increased output of goods and services in a nation's economy.

He expects his Social Democratic government to approve today a package of tax changes - billed as the biggest in the world - that will reduce the top marginal income tax rate from 72 percent to 50 percent, exempt 80 percent of taxpayers from national income taxes, and reduce 21 income tax brackets to two in 1991.

The reform, under discussion for months, has the goal of making Sweden's tax system less cumbersome and inequitable, as well as providing greater incentives to work.

``We want to increase the efficiency of our economic system,'' said Mr. Feldt in an interview. He was here last week for the joint annual meeting of the International Monetary Fund and World Bank.

The changes are not meant to dilute Sweden's generous social-welfare system. In its overall impact on tax revenues, the tax reform is intended to be neutral

``We won't repeat the mistake made in the United States,'' said Feldt, referring to the massive tax cuts early in the Reagan administration, cuts that many blame for the series of huge federal budget deficits that have followed.

Under the proposed Swedish reform, taxpayers will continue paying a 30 percent municipal income tax. But the national income tax will kick in at 20 percent on all income above 200,000 kroners ($30,000) a year. Income tax loopholes will be closed. Earnings from capital (either capital gains or interest) will be taxed at 30 percent. Corporate income tax rates will be reduced to 30 percent from 52 percent, but various tax deferrals will be eliminated. And the coverage of the nation's 23.5 percent valued-added tax (a type of sales tax) will be broadened to more goods and services.

Swedes will remain the most heavily taxed people among the industrial democracies. Nonetheless, the reform reflects a growing interest in a somewhat more liberal, less regulated economic system.

Feldt, a longshoreman's son got a doctorate in economics from the University of Lund, became finance minister in 1982 He says he is ``rather proud'' of the fact that since then the government's share of total national output has declined from 67 percent to 60 percent - still far above the 35.6 percent in the United States.

Moreover, he does argue that the present tax system is ``illogical in many respects.'' It signals Swedes that it is ``silly'' to work and save, ``smart'' to borrow and speculate.

Sweden's high marginal tax rate has driven away to tax havens some high-income citizens, including a famous movie director and a tennis star.

As usual with important legislation in Sweden, the tax reform bill is being subjected to a process of discussion and negotiation within the Social Democratic Party, including the LO, its powerful blue-collar trade union ally. ``We will see if there are weak spots in the package to be corrected,'' said the minister.

The Social Democrats, which have less than a majority of the seats in parliament, will need to win allies in the Folk Party (liberals) or the Center Party (conservatives). A detailed proposal is to go to parliament next March and the reform is to take effect in January 1991.

``There is no stable left-wing majority in Sweden,'' Feldt grumbled, noting that the Communist Party is ``dissolving in a way ... turning into a small populist party.''

In a country where egalitarian principles have dominated since the 1930s, the fact that tax reform will be of most benefit to high income individuals annoys many inclined to leftist views, either within the governing party or without.

Feldt would also like to see some changes in the social-welfare system, especially the socialized health-care system. There are lengthy queues for some medical procedures. An acute shortage of medical staff has resulted in the closing of some hospital wards.

``The problem of the system is that we take care of people,'' says Feldt. ``We pay, we pay, we pay.''

He would like to tinker with the system to encourage people not to seek early retirement when not feeling entirely well, or not to stay in hospital for lengthy periods when they would be as well off at home.

``We want to activate them, not hospitalize them,'' he says. ``We are loosening up old dogmas.''

He would like to have social institutions try to copy how the free market operates, giving people more choices and paying more attention to costs.

``This is an exciting way of changing the welfare society,'' Feldt asserts. ``Whether it works remains to be seen.''

Sweden's welfare society tends to be either envied or detested around the world. Some reformers in the Soviet Union and other communist nations see Sweden as a potential model for their own societies. Contrariwise, some conservatives attempt to find fault in Sweden, seeing its prosperity and relative social harmony as a threat to full-fledged capitalist systems. Right-wingers, for instance, will point to a decline in Swedish living standards in the past decade.

Feldt admits devaluations of the kroner amounting to 40 percent did reduce Swedish real wages by 12 percent between 1978 and 1984. Since then living standards have recovered 5 percent. The policy choice was conscious, he notes. It was designed to switch income from households to industry in order to make business more profitable and encourage expansion. This resulted in such an expansion of jobs that Sweden has only 1.5 percent unemployment, far lower than other European countries. Indeed, the economy is regarded as overheated.

``We want to avoid the two-thirds society,'' he says, speaking of a nation where about one-third or one-quarter of the population are poor, possibly unemployed, and certainly not enjoying the prosperity of the majority of the people.

The Swedish government is moving in other areas to liberalize its economy. The central bank abolished foreign exchange controls this summer. Feldt talks about reducing protectionism for Swedish farmers, starting next year. A blue-ribbon committee of Social Democrats, including Feldt, charted several weeks ago a new course for the party, emphasizing ``the individual persons possibility for development and growth.'' The key slogan in the document was decidedly untypical for Sweden: ``Boss over oneself.''

Nonetheless, the Swedes are looking to fine-tune their social-welfare system, not end it. They are reevaluating the means for providing their system of socialized day care, medical care, unemployment benefits, and so on, not to weaken them.

NATIONAL TAX BURDENS Total government spending as a percentage of national output (1986) Australia * 35.3 Britain * 44.9 Canada 43.0 France * 49.4 Germany 42.9 Italy * 51.9 Japan * 26.9 Netherlands 54.0 SWEDEN 59.9 Switzerland 30.4 United States 35.6 * 1985 figures SOURCE: Organization for Economic Cooperation and Development

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