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October 15th, 2012

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Sweden is bowing out of the long-standing competition with Denmark to have the world’s heaviest tax burden.

A strong economy and low public debt has allowed the Swedish government to cut its corporation tax and increase the tax deduction for those in work.

The result of the tax cuts, according to the liberal think-tank CEPOS, will reduce Sweden’s combined tax burden in 2013 to 43.9 percent of GDP, while Denmark’s will be 48.7 percent of GDP – the greatest gap in almost 50 years.

Sweden’s move has been congratulated by various actors in the Danish business world who argue Denmark ought to follow their neighbour’s lead.

“People abroad still think Sweden is the country with the largest public sector and the highest tax pressure,” CEPOS’s chief economist, Mads Lundby Hansen, told Jyllands-Posten. “But that’s no longer true. Denmark occupied that role long ago. We have taken the throne and become the new Sweden.”

Denmark’s combined tax pressure has increased under the current government, which has introduced a series of new taxes and levies since their election last year.

According to Hansen, Sweden’s tax reductions will only help reinforce its economic growth, which is forecast by the OECD to outpace that of Denmark.

“Sweden is now pulling away from us. They have already caught up once before with [the level of] welfare, and now OECD’s growth prognosis shows that Sweden will now experience higher growth than Denmark. They will also maintain higher levels of welfare and that’s not unusual with such a low tax pressure,” Hansen said, pointing out that OECD calculations show that for every two percent the combined tax burden is increased, 1-1.5 percent of welfare is lost.

“If we reduced our tax pressure to the Swedish level, we would be able to reduce our marginal tax rate to 42 percent and the corporate tax to 12 percent,” Hansen said.

Denmark’s leading business lobby group, Dansk Industri (DI), wants to emulate Sweden’s success and reduce Denmark’s tax burden to 45 percent of GDP by 2020.

“Our combined tax burden is simply too high,” Jacob Bræstrup, DIs director of tax policy, told Jyllands-Posten. “We need to remove the upper income tax bracket (topskat), reduce corporate tax to 15 percent and remove or reduce most of the fees and levies on consumption and business. If we want to be among the world’s richest countries again, it requires investment and growth.”

An expensive public sector and a currency crisis prompted the Swedish government in the early 1990s to implement cost-saving methods and reforms to balance the budget.

While groups such as DI think the government should emulate Sweden’s economic reform, AE, an economic policy institute and think-tank, dismissed the significance of having a higher tax burden percentage.

“If a high tax burden was bad, then all the Scandinavian countries would have ended up in the dog house long ago. What’s important is how the money is used,” AE’s managing director, Lars Andersen, told Jyllands-Posten. "Of course we can learn from the Swedes, but it makes no difference whether our tax burden sits three percentage points higher or lower.”

Larsen added that having a high tax pressure and a big public sector does not necessarily have to burden the competitive ability of businesses. He argues that ensuring high levels of education, research, and infrastructure will all strengthen businesses.

Torben M Andersen, an economics professor at Aarhus University, said that while Sweden has emerged from the crisis better off than Denmark, the results of their tax reductions remain to be seen.

“Tax pressure as a combined number needs to be interpreted with caution when comparing between countries, although it does make sense to compare ourselves to the Swedes," Andersen told Jyllands-Posten. "They have managed to take control of their public spending and thus have had the economic space for certain tax reduction even though the effects have yet to take shape.”