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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