America, even with Republicans in the House and possibly Senate, runs the risk of becoming the model sclerotic empire, wasting away while other states move toward more freedom. Canada and Sweden, nations we conservatives and libertarians used to scoff at as silly, are starting to beat the US on measures of freedom and competitiveness.
Sweden is one country to watch. First, it does socialism about as well as any state could. (of course, this is easier when your nation is small, homogeneous, and free of the burdens of world leadership). Next, unlike the US, Sweden is moving in the right direction, toward that conservative (in the true meaning of the word) ideal of a 3rd way, where the welfare state, to the extent it exists, is individualized.
Sweden’s Quiet Revolution
Without much fanfare, the Scandinavian country has been moving away from socialism.
There is something about Sweden that provokes a mix of envy, horror, and bewilderment among American observers. Liberals have traditionally celebrated its cradle-to-grave safety net, while conservatives have disparaged its high taxes and centralized health-care regime. Yet both groups have generally agreed that Swedish-style socialism is a far cry from rough-and-tumble U.S. capitalism.
In fact, contemporary Sweden is much less socialist than many Americans realize. Since the early 1990s, when it suffered a painful financial crisis, the Scandinavian country has deregulated key industries (such as airlines, telecommunications, and electricity), lowered its overall tax burden, established universal school vouchers, partially privatized its pension system, abolished certain government monopolies, sold a number of state-owned enterprises (including the parent company of Absolut vodka), and trimmed public spending. Several years ago, it eliminated gift and inheritance taxes. The World Economic Forum now ranks Sweden as the second-most competitive economy on earth, behind only Switzerland. According to the 2010 Index of Economic Freedom (compiled by the Wall Street Journal and the Heritage Foundation), Sweden offers greater business freedom, trade freedom, monetary freedom, investment freedom, financial freedom, freedom from corruption, and property-rights protection than does the United States.
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Bolstered by prudent economic stewardship and a relatively conservative financial sector, Sweden entered the global recession on a sound footing. While it endured a nasty spike in unemployment, its export-driven recovery has been so vigorous that the central bank is now concerned about inflation risks. In the second quarter of 2010, Sweden posted a 4.6 percent annual growth rate, prompting the Wall Street Journal to hail it as “the biggest success story in post-recession Europe.” It currently has the lowest deficit-to-GDP ratio in the entire European Union. Before the election, Swedish finance minister Anders Borg announced plans to privatize another $14 billion worth of state assets. “If we get a surplus in place,” Reinfeldt told a Reuters interviewer, “we will deliver on tax cuts for 6.1 million workers and pensioners.” (The total Swedish population is roughly 9.4 million.)
To be sure, Sweden won’t look like Hong Kong or Singapore anytime soon. It still has a lavish welfare state, and its aggregate tax burden is still quite heavy. The top marginal income-tax rate is 57 percent in Sweden, compared with 35 percent (for now) in America. On the other hand, a 2008 OECD study found that household taxes are substantially more progressive in the U.S. than they are in Sweden, even after we control for America’s higher level of income inequality. Sweden has a much lower average statutory corporate-tax rate than the U.S., and also a much lower effective corporate-tax rate on new capital investments (according to University of Calgary economists Duanjie Chen and Jack Mintz). Its tax structure is made even more regressive by a 25 percent value-added tax on consumption of most goods and services.
Which brings us to a common misconception about the Swedish system — that it takes from the rich and gives to the poor. Actually, says Lund University economist Andreas Bergh, “the majority of the taxes you pay are given back to you during your life cycle.” Thus, “if you pay more when you work, you will also get more when you retire.” Even upper-class Swedes enjoy bountiful government largesse.
Another popular myth would have us believe that Sweden’s wealth was somehow created or facilitated by social democracy. In reality, “Sweden’s prosperity is the result of well-functioning capitalist institutions,” says Bergh, author of the new Swedish-language book The Capitalist Welfare State. As Cato Institute scholar Johan Norberg explained in a 2006 National Interest essay, the relative “success” of the country’s social-democratic model “was built on the legacy of an earlier model: the period of economic growth and development preceding the adoption of the socialist system.”
I didn’t have room for it in my post, but Sweden has also gone to a negative interest rate on excess central bank reserves. Ingenious! Banks are penalized for locking money up with the central bank instead of lending it out.
The top marginal income-tax rate is 57 percent in Sweden, compared with 35 percent (for now) in America.
Bearing in mind, of course, that the 35% is just the federal rate. Adding in state taxes, many Americans are close to the Swedish rate.
Do the Swedes separate payments into their retirement system from general income taxes as we do here? Do they have any form of separate state or local income taxes?
If they do not, then our respective top marginal tax rates can be even higher, depending on what state you live in. In California, the top tax rate for the state is 11 percent. When combined with the Social Security/Medicare tax rate of 7.65 percent, you reach a combined tax rate of 53.65 percent. If you’re an independent consultant and have to pay both sides of the Social Security/Medicare tax, your tax rates can reach 61.3 percent.
Even those percentages are somewhat low, given the phaseouts of certain deductions which occur at higher income levels. If the Bush tax cuts are allowed to expire, the top marginal tax rate in California will be in excess of 65.9 percent!
Now, some will claim that the Social Security/Medicare tax rate is not that high when you reach the income levels which trigger these tax rates. That is true if you are single or married with only one working spouse. However, if you are married, both work and the first spouse does well, the income of the second spouse is actually taxed at that exorbitant level from the very first dollar earned.
Sweden and Norway have very different histories, also. The welfare state is a descendent of the Chuch’s care of the poor which was secularized in the Reformation by transferring the responsibility to townships. What we see now has been evolving for 500 years. They are going to have to deal with their Muslim immigrant problem so I won’t be moving there anytime soon.
I was recently at a long business meeting with colleagues from our Sweden office. Socializing with them afterwards, I was pleased to hear most of them being very critical of socialism, open immigration, and nanny-statism in Sweden.
They sounded like Swedish Tea Partiers!
Let me also add that Sweden’s prosperty in the modern era began with their early adaptation of hydroelectric power in the late 19th and early 20th century.
Sweden has extensive hydro resources and their large projects have long resulted in the lowest electricity prices in Europe. Their industry flourished with low electric costs and abundant availablity.
A few years ago, the Swedish government decided to open their electric market and build transmission into Europe. The result was a big price increase for Swedish consumers and industry and windfall profits for the government as they made big profits from the difference in Swedish production costs and European market prices.
Cheap energy drives modern economies and Sweden is the case study.
This is one reason Sweden is rescinding their nuclear shutdown plans and spending big krona on uprating their existing fleet of nukes (29% in one case!) Neighboring Finland is building new nukes like crazy too.
I’ve a friend at the University of Uppsala who is a professor of energy economics who explained this to me in detail.
The Swedes have a flat payroll tax (social security, etc) charged over and above income taxes at a rate of about 24%. Local tax rates vary only slightly. Income taxes are progressive, and the effective total individual tax rate thus ranges from the 40s to the 60s. Once you’re done paying that, don’t forget about the 25% VAT charged on almost everything you buy (food and books are lower), plus surtaxes on things like cigs, booze and petrol.
Capital gains taxes are competitive on the world market, however, so people who make their money by buying and selling assets do fine. If you’re doing well as a consultant, individual tax rates can be gamed by accumulating assets in your company and then selling it. I’ve never managed to do this, but I know others who have.
What a boring comment this is, but I guess it’s informative for the right reader…
If Sweden is such a paradise, why do they prohibit people from buying one-way airline tickets – according to Swedish students in American universities?
@Robert61 – Great comment, actually, you answered all my pending questions after reading the article. Do you know what the actual capital gains tax is?
Hmmm, Sweden is the second most competitive economy (to the Swiss), but they are no Hong Kong nor Singapore.
I’m confused.
Dear Mr. Behrend: Given a) the Islamic invasion of Sweden (such as Malmo’s being turned into a no go zone and b) sharia law’s notorious hostility to free markets and capitalism generally, I think this phenomenon is temporary. What do the Islamists care for Sweden, save as a staging post for expansion?
Sincerely yours,
Gregory Koster
Staying out of WWII left them a lot of money which they invested in the 40’s-50’s version of high-tech in shipping, lumbering, and cars – at a time when nobody else had much free cash to invest. It was a big advantage in competitive international trade.
Swedes are capitalists when dealing with other countries, socialists when dealing with other Swedes. How that will play out with the unexpected Malmo experiment remains to be seen.
When I lived in Sweden I often compared my taxes with my colleagues’ (we all made about $200K). Generally when you add in state taxes, Social Security, and Medicare, I paid a slightly lower tax rate on average but about the same marginal rate. The difference is that if a Swede goes and works in Norway, they don’t get taxed at all by Sweden. As an American expat I have to pay Uncle Sam wherever I am.
There are a lot of myths about Sweden, but the most relevant right now is this… In the US we have an anti-business president who wants to shrink the private sector to expand the public sector. In Sweden industrial policy was set in the critical years in the posh old offices of Investor AB, owned by the Wallenberg family, the wealthiest in Sweden. The capitalists in Sweden put up with socialism in exchange for industrial harmony and a rather libertarian low-regulation government that supported the development of export industries. Sweden’s poor farmers became middle-class and a few families got rich, but they weren’t allowed to show it off, for fear of fomenting resentment in the hinterlands. In the US we have the opposite on almost all of these counts.
Nowadays this is all still true in Sweden, which is why you have great Swedish and successful companies like Volvo, Skania, Saab, Sandvik, Atlas Copco, Trelleborg, and many great industrials. Unfortunately the Swedish business environment is not at all conducive to new business or small business, which is why there are virtually no major Swedish companies less than 50 years old.
The biggest threat to Sweden is one no Swede will talk about in polite company: their giant, unintegrated, shiftless, welfare-dependent, violent Muslim population. They generally are holed-up in grim communist-style housing blocks built as part of the “million homes” program of the 1960s in decrepit suburbs like Rinkeby and Malmo. The local media refuse to report on Muslim crime, for fear of sounding racist. Swedes do their best to ignore it. For example, you pay an extra kr. 5 to get to the airport with Taxi Stockholm because they have fewer Muslim drivers than the other taxi companies. You don’t take certain subway lines. You go to the clubs on Stureplan that make it known they don’t admit certain types of people. You don’t shop at Lidl because “that’s where the immigrants shop.” When you get to know a Swede well enough they’ll admit that the country is quite racist despite attempts to seem the opposite. At some point this all will blow-up.
Bottom line: Sweden is not the US, and we’re not Sweden. Sweden is interesting, but we need to continue with what made our country great: free people, free markets, limited government… all of which we have less and less of.
“Author Says: If Sweden is such a paradise, why do they prohibit people from buying one-way airline tickets – according to Swedish students in American universities?”
One way tickets are of course legal and available for purchase in Sweden.
USA requires a return ticket for every non US citizen visiting USA.