An Exciting Post About Swedish Tax Rates…

…And Land Use Policy (just kidding about land use — with apologies to Michael Dukakis).

Returning to the Eurostat entitlement spending data reported above, we find that since Mr. Borg took office in 2006, the share of Sweden’s GDP that is spent on tax-paid entitlements has gone up from 29.8 to 31.5 percent. Other Eurostat data on total government spending shows that government gobbles up 52-53 percent of GDP on average, and does so even with Mr. Borg being in office since 2006.

Will someone please explain to me how spending one third of the economy on entitlements, and running more than half of GDP through government, is good libertarian policy?

Even more surprising is de Rugy’s suggestion that Mr. Borg has cut some kind of top income tax. If Ms. de Rugy won’t take my word for it, she can check for herself: there has been NO cut in the top marginal tax rate in Sweden. Contrary to what de Rugy is trying to tell us, Mr. Borg is adamantly defending Sweden’s high marginal income taxes, which for 2012 force the highest earning Swedes to surrender more than 60 percent of their last earned krona to the government. They have been there for the past two decades.

De Rugy completes her backward homerun with a suggestion that Sweden’s “fastest-growing” GDP is somehow related to some sort of policies for limited government. Nothing could be further from the truth, as national accounts data from Statistics Sweden reaveals. The latest growth spurt in the country’s GDP is entirely due to a rapid increase in exports:

•Exports is the largest share of GDP in Sweden, bigger even than private consumption;
•Sweden has a foreign trade surplus equal in size to government consumption!
•The growth spurt in the Swedish economy over the past couple of years is driven entirely by a surge in exports. There is no domestically sourced growth, and no discernible spillover effects from exports to private consumption.

In short: Sweden is an industrialized banana republic, divided into two sectors: a thriving foreign-trade sector and a depressed domestic sector with a government-run health care monopoly with enormous waiting lists, the highest taxes in the world and, with the new earned income tax credit that Mr. Borg pushed through, marginal tax rates for low-income families are among the highest in the world.

– from “Bad Austerity Analysis: Response to Veronique de Rugy” in this post on the “Liberty Bullhorn” blog

Dear Sven,

I haven’t been blogging much, for no particular reason other than the fact that I’m kind of lazy, but your recent ‘attack’ on one of my favorite libertarian economic writers, Veronique de Rugy, and our susequent mini-debate in the comments of your post have prompted me to finally overcome my natural lethargy (induced by too many years of government sinecure? I real possibility I admit) and write to you on the always exciting subject of Swedish tax rates and the grander topic of the meaning of austerity.

Let’s begin with the easy stuff — Swedish tax rates. You claim that Sweden did not reduce the top marginal income tax rates once the center-right party came to power in Sweden in 2006. You link to a table that shows very high marginal tax rates for high incomes. I will assume you are correct for the moment and that you found an error in De Rugy’s analysis. However, what you should have gone on to point out to your readers is that Sweden has cut taxes on income (and even property taxes for the rich) as a quick search of a simple newspaper article can confirm. Of course, I didn’t originally link to this newspaper article in my comment on your blog, I linked to one of the most intelligent and insightful economics bloggers working today, the Swedish speaking Tino Sanandaji. You foolishly dismissed the posts from Tino that I linked by saying “First of all, you need to read Tino’s blog again. He does not talk about tax cuts – he talks about taxes as share of GDP. These are two different statistics, and I am surprised the difference escapes you.”

Actually Sven, Tino specifically talks about tax cuts — as I pointed out to you in my original comment. In this post Tino says, and I quote, “Sweden is becoming a moderate tax country again…This development also means my personal taxes have gone down a lot, although to be honest as a tax-nerd I care much more about the implications for the policy-debate.” Seems clear enough to me, although yes, Tino uses tax revenue as a percentage of GDP to show how taxes have gone down. This can indeed be misleading if economic growth has been booming and your tax rates don’t change at all or even go up at the same time as revenue to the government increases because economic growth means there is a bigger piece for the government to take. But Tino’s tax graph shows the exact opposite — tax revenues as a percentage of GDP goes down while we know that the Swedish economy has done well — which implies that rates must have gone down as well.

Of course, getting back to Tino’s specific words in his posts, the first post I link to says the following, and I quote, “A common critique in Sweden is that the right-of-center government has cut welfare in order to reduce taxes for the affluent. Indeed taxes have been cut sharply.” How much clearer can Tino be? To be sure, he doesn’t say taxes were cut for the affluent, only that taxes were cut and cut “sharply.” Further, in light of the fact that I now have a newspaper article telling me that the Swedish government that came to power in 2006 cut all sorts of taxes on labor income and I have one of the smartest economic bloggers around telling me that the Swedish government that came to power in 2006 cut taxes, I did some Googling and I found one more source that told me the same thing, the OECD in this report which says, “Sweden significantly reduced the tax and social security burden on labour income between 2000 and 2011.” So maybe some of those cuts happened before Anders Borg became Finance Minister? Who knows — what I do know is that Sweden cut their tax rates over the past five plus years, so if you want to have any credibility on this subject matter in the future, you should start by acknowledging reality.

Finally, a few words about the broader topic of your original post, which wasn’t about Swedish tax rates but about the subject of austerity. You and I are just going to have to agree to disagree on the subject, as you insist on defining austerity in a narrow and rigid way that doesn’t match the way the general public thinks about the topic or the way the liberal commentators who were being critiized by De Rugy were using the word. De Rugy makes it very clear in the posts I linked to (and more recently in this post praising the Canadians) that she wants to defend the idea of spending cuts against those who want to grow the welfare state. You think that using the term “austerity”, because it can potentially refer to “deficit reduction” which can include tax increases as well as spending cuts, is bad because it confuses folks and helps the left in their efforts to keep the welfare state strong.* While it is certainly true that Western Europe and Canada are no libertarian paradise and in many ways inferior from a statist point of view to America, their right-of-center governments have had some success in cutting spending and rolling back their bloated welfare states. As much success as you and I or even De Rugy would like? Of course not, but the point of using them as examples is that there is indeed macroeconomic evidence that spending cuts help promote growth**. Now get off your high-horse and join in the fight to make those cuts a reality!

*To be fair, you have a follow-up post that provides a more complicated argument that boils down to “cuts without a long-term plan to replace the welfare state can be dangerous because people will still want their welfare state goodies”. While I think this idea has some merit, it is not clear that De Rugy or all the folks she is citing would disagree (see quote below). On the other hand, I also think you downplay how important these cuts and a reduced federal government can be to economic growth, which is what will ultimately wean a free and independent people off of the welfare state.

**from the link:
“3.Lots and lots of papers have now studied this question and the evidence is rather clear: the types of austerity that are most-likely to a) cut the debt and b) not kill the economy are those that are heavily weighted toward spending reductions and not tax increases. I am aware of not one study that found the opposite. In fact, we know more. The most successful reforms are those that go after the most politically sensitive items: government employment and entitlement programs.”

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