“People everywhere enjoy believing things that they know are not true. It spares them the ordeal of thinking for themselves and taking responsibility for what they know.” – Brooks Atkinson

Sweden’s Democratic Socialism:

Can We Have It in the US?

Are We Willing to Do What It Takes? 

On Friday, we talked about Sweden – Bernie Sanders’s economic model for what the US could become. As I said then, there’s much to be admired about Sweden’s economy and social welfare system. Swedes enjoy high living standards, low poverty, government funded education through college, universal health coverage, generous parental-leave policies, and much more.

And the Swedish government does this without printing fake dollars and going into trillions of dollars’ worth of debt, like the US government does.

I wondered: “How does Sweden do it? How does it provide so many benefits for its population and yet remain prosperous? And what can we learn from them?”

Let’s start with the best-known answer: Swedes pay a lot in taxes.

Swedish Taxation: It’s Not What You Think 

It’s true. The Swedish government puts a heavy burden on its taxpayers. But here’s something I found interesting. Swedes are generally happy with their tax system because they feel like they are getting a fair shake. Despite paying higher taxes than their American counterparts, working- and middle-class Swedes trust their politicians.

What’s going on?

Like the US, Sweden has a “progressive” income tax. If you make less than 18,000 kroners, you pay no income tax. (Roughly the same as in the US.) If you earn more than 18,000 kroners but less than 434,000, you pay about 31%. If you earn more than 434,000 kroners but less than 509,000 kroners, you pay 52% (32% plus 20%). And if you earn more than 509,000 kroners, you pay 57% (32% plus 25%).

57% is about 20 points higher  than high-income earners pay in the US. And that has given many people – including, presumably, Bernie Sanders – the idea that all those great Swedish benefits are paid for by the rich. In Bernie’s terms, they are paying their “fair share” of the tax roll.

But the fact is that Sweden’s heralded social service programs are paid for, mostly, by working-class and middle-class Swedes. Despite that 57% tier at the top, the overall taxation in Sweden puts the heaviest load on the bulk of the population.

Let’s see how that works.

Income tax in Sweden has three components: a municipal tax, a national tax, and a social services tax.  And as I said, it is designed so that higher earners pay not just more kroners but a lot more, because they are taxed in tiers that increase as the taxpayer’s earnings increase.

If that were the entire tax system, the perception of the rich paying the bulk of the taxes would be true. But Sweden has another very significant source of tax revenue that most Americans know nothing about. They have a national 25% sales tax that is built into the price of almost everything.

Think about that for a moment. This is a tax that applies to everyone: the rich, the middle-class, the working class, and even the poor!

(NOTE: To mitigate the effect on those earning less than 18,000 kroners, there are a few exceptions (e.g., basic foodstuffs) where the sales tax is lower or doesn’t apply.)

If you are making, say, 50,000 kroners a year, you’ll pay 31% of that in taxes, which would be about 17,000 kroners. Then, with the 33,000 kroners you have left, you’ll pay another 25% on everything you buy!

Thus, most working-class and middle-class citizens in Sweden end up paying between 40% and 50% of their income in taxes, depending on their spending.

So that’s one big surprise for anyone that thinks the Swedish model would affect only the top 1% –  or even the top 10% – of US taxpayers. If we used it here, taxes would go up for probably 80% of the population.

Here’s something else that might surprise you (that Bernie may not know): Sweden has no property tax, no gift tax, andno inheritance tax. In the US, these three taxes account for a significant share of the common tax burden. And they are almost entirely paid for by the top 10%.

The bottom line: Swedes pay a lot of taxes – considerably more than Americans that make the same income. And although the top income tax rate in Sweden is 20 points higher than it is in the US, when you consider the national sales tax and the lack of property, gift, and estate taxes, you find that, from a tax perspective, it’s actually better to be rich in Sweden than it is in the US.

Capitalism vs. Socialism: Again, It’s Not What You Think

Sweden has a long and interesting history of free-market Capitalism and social welfare programs.

In the 19th century, Sweden introduced large-scale economic reforms. It reduced the size of the government, deregulated the financial sector, eliminated trade barriers, and lowered taxes across the board. As a result, Sweden became one of the strongest and freest economies in Europe and remained so during the first 60 years of the 20th century.

Feeling flush, it began its grand experiment with Socialism – introducing massive social welfare programs, increasing regulations of and restrictions on business and finance, and imposing new taxes and raising existing ones. Starting in the late-1970s, the Swedish economy began to slow down. Among other things, Swedish exports had become too expensive due to the high wages and payments made by employers into the government welfare-state programs. As economic growth slowed, Sweden found it increasingly difficult to pay for its system of social welfare benefits.

Rather than increase already sky-high taxes, the government publicly admitted that its grand experiment in Socialism had failed. And it immediately set in place a wide range of reforms, including lowering taxes, re-imposing trade barriers, reducing business regulations, and promoting free trade. They also began the widespread turnover of publicly owned and run industries into private hands. This happened in every key sector, including health, education, and banking.

Approximately 90% of all resources and companies are now privately owned, with a minority of 5% owned by the state and another 5% operating as either consumer or producer cooperatives. Sweden is a world leader in privatized pensions, and its pension funding problems are small compared to many other Western European countries. The state owns one bank, which mainly offers mortgage loans.

It’s also important to note that one of the factors in Sweden’s economic success has been its longstanding commitment to avoid foreign entanglements. Following WWI and WWII, unlike many other countries, it didn’t have to struggle to pay back huge war debts.

It maintained its neutrality during the second half of the 20th century, abstaining from involvement in at least a dozen of the proxy wars that followed WWII. As a result, Sweden never developed a military industrial complex, as we did in the US, which means that its defense budget is relatively insignificant in terms of the country’s economy.

(FACT: Only 5% of taxpayer money in Sweden goes to the police and military combined. In contrast, the US military consumes more than 30% of government spending.)

While economic freedom has decreased in the US and the UK in the last 30 years, it has increased in Sweden.

Bottom Line: In terms of its economy, Sweden is about as far from Socialist as an economy can be.

So… Could It Work in the US?

Sweden did not become wealthy through social democracy, big government, and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. As late as 1950, Swedish tax revenues were still only around 21% of GDP.

Rapid growth of taxes, state ownership of businesses, and government regulation in the late 1960s, 1970s, and 1980s led to a large decline in Sweden’s relative economic performance. In 1975, it was the 4th-richest industrialized country in terms of per capita GDP. By 1993, it had fallen to 14th.

To reverse that decline, Sweden again introduced market reforms in almost every sector of the economy. And, again, it worked. Sweden’s relative economic performance improved accordingly.

If we wanted to adopt the Swedish model and provide such social services as (mostly) free healthcare, (mostly) free education, universal retirement benefits, and 5-week vacations, this is what we would have to do:

* Close down the war on poverty.

* Close down the war on drugs.

* End the cold war with China and Russia.

* Drastically shrink the military.

* Decrease tariffs and other trade barriers and encourage more free trade.

* Deregulate industries, almost across the board.

* Abolish minimum-wage laws.

* Do away with occupational licensing.

* Reduce the corporate tax rate.

* Reduce banking regulations.

* Abolish property taxes.

* Abolish gift taxes.

* Abolish inheritance taxes.

* Increase private schooling by instituting a national voucher system for education.

* Reform Social Security from defined benefits to defined contributions.

* Provide private pension accounts in lieu of Social Security.

* Institute a national sales tax of 25%.

* Increase the Social Security tax to 25% and apply it to all taxpayers.

Given the fact that Swedes are, by every survey, happier with not just their lives generally but with their government, their policing, their welfare system, and their taxes, this might be the way to go. For someone like me who believes in personal freedom, limited government, and free-market Capitalism, it is a very attractive prospect. But I’m not sure that if Bernie and his supporters actually understood the economic realities of Sweden they would go for it.

This essay and others are available for syndication.
Contact Us  for more information.