SOCIALISM
Insider_Spring_2016_WEB
Insider_Spring_2016_WEB
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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 />
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