Thursday, April 05, 2007

SWEDEN TO DROP WEALTH TAX

Sweden's new center-right government has axed the country's wealth tax, decades old uninterrupted symbol of the left-wing rule.

The eradication of wealth tax is said to be based on limiting tax breaks which ought to be released in the next year's budget. Up until now, there has been a unique 1,5 percent tax rate on personal above SKr 1,5 million for singles while the level for cohabitees and marriage couples equals SKr 3 million. In the previous year, government collected SKr 4,8 billion from wealth tax. It is estimated that nearly SKr 500 billion venture capital is out of the country. The wealth tax has contributed to the low level of Sweden's investment and disappointing entrepreneurial activity until first fiscal and structural reforms were imposed in the early 90s. Among EU25, Sweden ranks 18th in terms of the percentage of citizens running their own business.

Sweden is one out of four OECD countries which tax personal wealth. Sweden's uniqtue wealth tax was introduced in 1947 and has left damaging consequences ever since as capital flight and brain drain skyrocketed. It taxed capital gains, luxury goods, inheritance and the well-off. Bjorn Borg felt compelled to move to tax-haven principality of Monaco, a residence to many successful Swedish individuals such as Anja Paerson, Kajsa Bergqvist and Christian Olsson. In the past decades, the wealth tax combined with complex, progressive and confiscatory taxation of corporate and individual income, many successful Swedes left the country. Ingvar Kampard, the founder of IKEA (Swedish global furniture store) was forced to leave Sweden to avoid the tax and setup overseas foundations managing his wealth. Mr. Kampard remembers those dark days of confronting tax bureaucrats in 1970s: "They said that all I want is profit and I replied that I was giving people jobs." In the last decade, several European countries have completely abolished wealth tax including Netherlands, Denmark and Finland.

The abolition of the wealth tax is a good step in a way of absorbing Swedish entrepreneurial potentials and reducing the overall tax wedge and burden in the share of the GDP. In empirical literature, there is hardly any strong evidence on the justification of wealth tax. In fact, wealth tax usually taxes goods with high price elasticity; mostly luxury goods which easily exercise tax avoidence and thus the negative side-effect of wealth tax tripples. Wealth tax burdens the productive behavior which is the basis of human capital creation, resulted in economic growth, structural advancement and stronger innovative capacity to absorb real competitive advantage and translate it into growth effort. It means fewer incentives to launch growth ideas and more incentives to avoid paying punitive taxes. The effect of the wealth tax, also negatively affects stock index and companies listed hardly see any particular reason to work on increasing capital gains and dividends to shareholders as an additional unit of capital accumulated means an additional tax burden to it.

Here's what experts say on the abolition of 'wealth tax':

"The big winners are, in the long term, all Swedes, because we need to have the conditions for jobs and companies necessary to match global competition. One issue is that little money stays in the country. There has been a big discussion in recent years about how globalization makes capital more and more non-national and harder to keep within national boundaries. This is a symbolic as well as a real move. It is important to have entrepreneurs and to offer them finance from other entrepreneurs. This will have a real impact on the willingness to invest."
- Anders Borg, Swedish Minister of Finance

"Many of those who made money here have made it from starting and building businesses and are keenly interested in supporting new businesses and young entrepreneurs."
- Tom Bergen, Swedish Venture Capital Association

"This is another step towards Sweden becoming a normal country."
- Maria Rankka, Timbro

Here's what you can read about this topic:
Sweden plans to scrap decades-old wealth tax in a move to stay competitive, Canada.com (link)
Sweden to abolish wealth tax, The Local (link)
Sweden axes wealth tax, Financial Times (link)
The Effect of Stock Prices of the Swedish Wealth Tax (link)

4 comments:

nadim said...

You're just one of the economists who defend a system that kills by the milllions

Mike B) said...

The working class creates the wealth using the wealth alreday existing in Nature. There is no reason why this socially created wealth should not go back to the working class through a tax system which directs said wealth towards social programs in the interest of the producers.

Oh...there is ONE reason or should I say, interest why this should not happen. It is the reason given by the ruling class that states: "We rulers know better what to do with wealth and that you workers should realise that what's good for our businesses is good for you."

Frederic said...

READ "ATLAS SHRUGGED"

Entrepreneurs create wealth only when there is an incentive for them to do so.

Everyone should be able to keep the fruits of their labors — including the rich.

You forget that wealth tax is STEALTH. It is taken by force and stolen from individuals whom you may resent for being the "ruling class", but yet are the engines of our economy and well-being.

Peter GLoor said...

I think you are wrong. Your argument amounts to a wealth tax is confiscation and confiscation is bad. Well income taxes, payroll taxes, property taxes, and sales taxes are all "confiscation" of income and wealth. (They are just set up -in the USA- to favor the wealthy.) Should we do away with them? Then we could close down our military, fire all policemen, stop educating our children, and do away with Social Security.

So let me see if I follow the rest of your argument about venture capital and jobs leaving the country. Say your net worth is 5 million dollars, which you earned and saved by relying on the infrastructure provided by federal state and local governments (and paid for by all taxpayers) like the public education of the workers at the business you invest in or cheap oil courtesy of military intervention in the middle-east. You make about half a million in investment gains yearly. Now you planned to invest $1million in promising startup in California, but Wait! - the government is now asking you fork over a 1.5% wealth tax. [It's a tax on your 4.5 million over the exempt amount (say $500,00) - that's $67,500 - the equivalent of 13% of your annual investment gain - if you are smart, you're already avoiding almost all the taxes on dividends/interest from those investments] It makes you so mad, you move your money to Monaco, pass up the startup opportunity and make sure none of your invesments are in US companies. You don't care that some of the best investment are in the US ... and the workers in those US businesses where you made your millions pay about 30% of their income over to the government.) You are taking your marbles and moving! Do you really believe anyone acts this way?

Government has to be funded and nearly all agree that what we each contribute should be somewhat commensurate with our ability to give. Any economist will tell you that the measure of anyones ability to contribute includes measures of their income and their wealth. See my website http://fairtaxes.officelive.com. It is easy in the United Sates at least for investing class millionaires to pay much less in taxes that struggling middle class families. A wealth tax addresses this.

The Swedes 1.5% tax on wealth greater than the equivalent $200,000 is reasonable. Don't think in 20 years that amounts to 30% (1.5x20) of one's wealth disappearing. Of course folks with that sort of money earn on average 8-10% on it annually, so the wealth tax reduces their net gain - just as income tax reduces the net take home pay of the working. (To be fair a wealth tax should be coupled with elimination of any capital gain and inheritance taxes). Many wealthy pay as much as 1.5% in investment fees. I don't think it's too much to ask us to pay a similar amount to educate our children, build roads, keep jets form crashing into each other, defend our boarders....

Again see my website: http://fairtaxes.officelive.com.