06.06.2016 Views

SOCIALISM

Insider_Spring_2016_WEB

Insider_Spring_2016_WEB

SHOW MORE
SHOW LESS

Create successful ePaper yourself

Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.

EPRENEURSHIP AND GROWTH<br />

A COMMON NOTION IS THAT SWEDEN, AND<br />

to some extent other Nordic nations, have embarked<br />

on a unique economic route: the Third Way. Third<br />

Way politics refers to an alternative to free markets<br />

on the one hand and Communism on the other.<br />

Indeed, policies did steer sharply to the left during<br />

the late 1960s in Sweden. Not only did the overall tax<br />

burden rise, but the new system also discriminated<br />

heavily against individuals who owned businesses.<br />

As politics radicalized, the social democratic system<br />

began challenging the core of the free-market<br />

model: entrepreneurship.<br />

TAXES TARGETING BUSINESS OWNERS<br />

Swedish economist Magnus Henrekson has concluded<br />

that the effective marginal tax rate (marginal<br />

tax plus the effect of inflation) that was levied on<br />

Swedish businesses at times reached more than 100<br />

percent of their profits. The table below shows the<br />

effective marginal tax rate for different combinations<br />

of owners and sources of finance. As can be<br />

seen, debt financing consistently received a much<br />

more favorable tax treatment compared with equity<br />

finance. In addition, the taxation of households<br />

was unusually steep due to high general marginal<br />

tax rates, high levels of inflation, and the combined<br />

effect of wealth and income taxation. Family-owned<br />

companies in particular were affected by a wealth<br />

tax on their net worth. It was not possible to deduct<br />

the wealth tax at the company level. Therefore,<br />

funds required to pay the wealth tax were first<br />

subject to the mandatory payroll tax as well as the<br />

personal income tax.<br />

Effective Marginal Tax Rates<br />

in Sweden in 1980<br />

Owner<br />

Households<br />

(private owners)<br />

Tax-exempt institutions<br />

(such as government<br />

pension funds)<br />

Debt<br />

New<br />

Share<br />

Issues<br />

Retained<br />

Earnings<br />

58% 137 52<br />

-83% -12 11<br />

Insurance companies -55% 38 29<br />

In 1980 a person who owned a business could pay<br />

an effective marginal tax rate of 137 percent on the<br />

returns on the capital raised by new share issues.<br />

This means that the individual would actually lose<br />

money by making a profit once the effect of both<br />

taxes and the inflation of the original investment<br />

were taken into account. If the business had been<br />

financed by debt, the venture became profitable,<br />

albeit still facing a high tax rate. Tax-exempt institutions<br />

and insurance companies could face negative<br />

effective taxation, due mainly to the effect of high<br />

rates of inflation.<br />

CAPITALISM WITHOUT CAPITALISTS<br />

Henrekson draws the conclusion that the tax policies<br />

were “developed according to the vision of a<br />

market economy without individual capitalists and<br />

Visit InsiderOnline.org | 5

Hooray! Your file is uploaded and ready to be published.

Saved successfully!

Ooh no, something went wrong!