The real Nordic model: higher taxes on low-income workers
Britons have a thing for the Nordic countries – especially so if you’re on the left. In their quest for well-functioning and more socially equitable societies, the Nordics have long played a utopian role for Britain’s left-leaning forces.
This ranges from envy of Sweden’s work-life balance and child care system, to reflections on Norwegian experiences, and grand plans by think-tanks to “win the Nordic model for the UK”, to discussion of Finland’s egalitarian and successful schooling and Denmark’s futurism.
British people often only look at what Nordic governments do on the spending side: expansive social welfare spending, generous benefits and impressive social equity. They hardly ever take a look at the accompanying revenue side.
Comparing Swedish and British governments unveils some interesting differences.
Yes, measures of country-wide income inequality put Sweden among the middle or lower end of its peers, with UK standing out; the Gini-coefficient after taxes and transfers has Sweden at 0.28 while the UK almost tops the EU-chart at 0.35. Similarly, incomes of the highest-paid 10% of British earners clock some 34% of all pre-tax income (progressive taxes put the post-tax figure at 28%), whereas their Swedish equivalents earn only 28% of pre-tax (24% post-tax) income. The much-despised top-1% of British earners receive around 12% of pre-tax income, whereas Sweden’s top-1% earners only get 8%.
Britain also taxes its population less than does Sweden (35% of GDP as opposed to 44%), but comparing the reliance of various kinds of taxes as government revenues makes this even more clear. In the figure below I have mapped out tax revenues as share of GDP in four categories of income; the first two bars from the left are taxes on labour (direct income taxes as well as indirect ones like payroll/national contribution levies) the third taxes on capital and the fourth various consumption taxes.
This shows the taxation differences between Sweden and UK. As we would expect from income tax rates, labour incomes are much more heavily taxed in Sweden than in Britain. They don’t, however, exclusively or even predominantly apply to high-income earners. Sweden holds the European record for the lowest level where incomes are subject to direct taxation, at one-seventh of Britain’s remarkably high Personal Allowance (£12,500). Moreover, the elevated indirect taxes (payroll taxes) apply on even the lowest incomes, greatly contributing to why Sweden has among Europe’s highest cost of labour, while UK is below average on this – something that may explain the 2.5 percentage point lower unemployment rate in Britain.
The UK relies more on capital taxation than Sweden – and this difference is not driven by corporation tax, which in both countries generate revenues of 3% of GDP. Rather, the big difference is that the UK taxes property a lot heavier than does Sweden, whereas Sweden relies on taxes on investment and savings more than does the UK.
Admittedly, comparing tax systems is tricky and relying on revenues as I have here does not show the full picture. For instance, a small open economy like Sweden may not have the ability to heavily taxing certain tax bases since the burden for relocating elsewhere might be small and corporations or individuals would simply up and leave if they deemed taxes to be too extractive; similarly, British tax authorities may have larger leeway in taxing high-value properties in London with no or little behaviour response, and thereby rely more heavily on properties for tax revenue.
Bursting the Nordic utopian bubble, Kristian Niemietz at IEA describes the Nordic economies as
relatively liberal, relatively lightly-regulated market economies, with relatively low levels of state intervention – but they are also, at the same time, economies characterised by high taxes, generous welfare states, and generously funded public services.
A few decades before writing The Wealth of Nations, Adam Smith concluded that all that was necessary for a successful country were “peace, easy taxes, and a tolerable administration of justice”. Whatever he thought of as ‘easy’ probably differs from what we would think of today. Nevertheless, a quick look into the tax revenues of Sweden and the UK should awaken the dreaming leftie. Spending like Sweden means taxing like Sweden – reduced property taxes, abolish wealth and inheritance taxes, hike taxes on productive investments and, most importantly: almost double tax revenue on even low-income labourers. Much less tempting, I imagine.
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British tax data is taken from Office for Budget Responsibility’s databank; Swedish tax data comes from ESV, The Swedish National Financial Management Authority, and can be easily accessible here.