SOCIALISM

EPRENEURSHIP AND GROWTH
A COMMON NOTION IS THAT SWEDEN, AND
to some extent other Nordic nations, have embarked
on a unique economic route: the Third Way. Third
Way politics refers to an alternative to free markets
on the one hand and Communism on the other.
Indeed, policies did steer sharply to the left during
the late 1960s in Sweden. Not only did the overall tax
burden rise, but the new system also discriminated
heavily against individuals who owned businesses.
As politics radicalized, the social democratic system
began challenging the core of the free-market
model: entrepreneurship.
TAXES TARGETING BUSINESS OWNERS
Swedish economist Magnus Henrekson has concluded
that the effective marginal tax rate (marginal
tax plus the effect of inflation) that was levied on
Swedish businesses at times reached more than 100
percent of their profits. The table below shows the
effective marginal tax rate for different combinations
of owners and sources of finance. As can be
seen, debt financing consistently received a much
more favorable tax treatment compared with equity
finance. In addition, the taxation of households
was unusually steep due to high general marginal
tax rates, high levels of inflation, and the combined
effect of wealth and income taxation. Family-owned
companies in particular were affected by a wealth
tax on their net worth. It was not possible to deduct
the wealth tax at the company level. Therefore,
funds required to pay the wealth tax were first
subject to the mandatory payroll tax as well as the
personal income tax.
Effective Marginal Tax Rates
in Sweden in 1980
Owner
Households
(private owners)
Tax-exempt institutions
(such as government
pension funds)
Debt
New
Share
Issues
Retained
Earnings
58% 137 52
-83% -12 11
Insurance companies -55% 38 29
In 1980 a person who owned a business could pay
an effective marginal tax rate of 137 percent on the
returns on the capital raised by new share issues.
This means that the individual would actually lose
money by making a profit once the effect of both
taxes and the inflation of the original investment
were taken into account. If the business had been
financed by debt, the venture became profitable,
albeit still facing a high tax rate. Tax-exempt institutions
and insurance companies could face negative
effective taxation, due mainly to the effect of high
rates of inflation.
CAPITALISM WITHOUT CAPITALISTS
Henrekson draws the conclusion that the tax policies
were “developed according to the vision of a
market economy without individual capitalists and
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