America sits at the same economic crossroads today that Sweden faced five years ago. Sweden’s experience in eliminating the death tax could help the United States save businesses and add jobs at a critical time.
Once known as Europe’s socialist paradise, Sweden still has one of the world’s highest top income tax rates (57 percent). But likethe US, it no longer has an inheritance tax, or what Americans commonly refer to as the estate or “death” tax.
The Swedish Parliament abolished its inheritance tax in late 2004. At the time, Parliament was controlled by a coalition of the socialist, green, and communist parties, not the current center-right Alliance for Sweden.
But Sweden was in the midst of a difficult recession. Unemployment was shooting through the roof. The country’s entrepreneurs were moving offshore – and taking their companies with them.
The death tax was only making a bad situation worse. Two of Sweden’s largest companies, IKEA and Tetra Pak, a food packaging company, had already moved overseas in protest of the estate tax. Other major companies threatened to follow, draining Sweden of entrepreneurial talent, capital, and jobs.
Swedish politicians, including those who favored the death tax in strong economic times, decided to repeal the law as a means to help grow the economy and restore jobs.
The Family Business Network of Sweden found that between 50 and 60 percent of Sweden’s new jobs were created by family businesses. By 2004, nearly half of these business owners were over 50, according to Statistics Sweden. The inheritance tax was very much on their minds.
Considering reports by the Swedish Tax Office that the death tax and its companion, the wealth tax, had already cost the government a staggering $200-plus billion in lost revenue – more than half the current Swedish gross domestic product – Swedish policymakers realized that the inheritance tax was a recipe for economic disaster.
Accordingly, the Swedish people – including the labor unions – put ideology and party labels behind them and the government repealed the tax.
Since then business advisers report that owners have been able to focus on company growth and job creation, rather than on avoiding the inheritance tax.
Statistics Sweden reports that 4,000 wealthy Swedes have returned since the repeal. Even the chairman of IKEA, Goran Grosskopf, acknowledged in a recent interview with the Swedish financial newspaper Dagens Industri that IKEA would have been able to stay in Sweden if the inheritance tax had been repealed before the company moved.
America today is in a similar spot to where Sweden was in 2005.
As in Sweden, family businesses in the US are the engines of economic growth and are often hit hard by the death tax. Further, the US economy is also in the tank, and the government is controlled by a political party that historically has supported the death tax, while politicians of all stripes are eager to find ways to promote job creation and economic growth.
The US does have a leg up where Sweden did not: The death tax already is on life support. US legislation that passed in 2001 put a temporary suspension on the death tax during 2010.
Congress is expected to take action this year, before the tax comes back to life at a 55 percent rate on Jan. 1, 2011. Some lawmakers want to reinstate the tax retroactively, while others want to increase the rate. What they should do is repeal the tax permanently.
As Sweden’s experience showed, when death taxes are repealed, family-owned companies expand, increasing payrolls, business purchases, and tax revenues.
Conversely, when governments threaten to confiscate half or more of a family business’s capital via the death tax, families do everything they can to protect themselves. In the US, that usually means spending a fortune on estate tax planning and life insurance, so the family won’t be forced to sell the business just to pay the Internal Revenue Service.
In Sweden, the death tax resulted in the loss of companies that moved offshore. In both countries, it has meant fewer jobs.
The good news is that the estate tax has already been temporarily repealed in the US – Congress just needs to follow Sweden’s lead and make the repeal permanent. By doing so, Congress would be saving businesses and adding jobs – not a bad day’s work, as even Sweden’s lawmakers found.