Lifetime and annual
tax progressivity in Sweden
Daniel Waldenström
Uppsala University
February 11, 2011, Ministry of Finance
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Overview of presentation
1. Swedish personal taxation: a brief overview
2. Tax progressivity - how should it be measured?
3. Annual and lifetime tax progressivity
4. What accounts for the results?
5. Concluding remarks
Daniel Waldenström, "Lifetime progressivity in Sweden"
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2. Personal taxes in Sweden
Consumption
Labor
VAT: 71%
Municipal: 93%
State: 7%
Capital
Company: 44%
Property: 15%
Other: 54%
Payroll
Daniel Waldenström, "Lifetime progressivity in Sweden"
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0
20
40
60
80
Marginal tax rates in Sweden, 2012
0
200000
400000
Earned/capital income (SEK)
Earnings MTR
Capital income MTR
600000
Earnings MTR + Payroll tax
Daniel Waldenström, "Lifetime progressivity in Sweden"
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3. Measuring tax progressivity
• Income concepts
– Market income (earnings, capital income, payroll tax)
– Disposable income (Market income − Taxes + Transfers)
• Taxes-transfers
– Taxes on earnings, capital, Property, Wealth, Payroll taxes
– Transfers: Taxed (sickness, unempl.), untaxed (child, house)
• Tax progressivity
– Redistributive effect: Inequality-reducing impact of taxation
– Disproportionality: Deviation from proportional taxation
Daniel Waldenström, "Lifetime progressivity in Sweden"
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4. Results: Evolution of Swedish taxtransfer rates, 1968−2009
0
100
Effective tax rate = (Market inc. − Disposable inc.) / Market inc.
-100
0
-200
20
-150
40
60
Effective tax rate (%)
-50
80
Financial crisis effect
1970
1980
1990
2000
2010
P0-40
P90-95
1970
1980
1990
2000
2010
P40-60
P99.9-100
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Annual tax-transfer progressivity
Disproportionality
Disproportionality
Financial crisis effect
20
30
40
50
60
Disproportionality (Kakwani,
K
70
80
)
20
15
10
0
10
5
0
RS
90
25
100
Redistributive
effect
Redistributive effect
1970
1980
1990
2000
2010
1970
1980
1990
2000
2010
Reymond-Smolensky index, ranking income vs disposable income
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Is Swedish progressivity internationally high?
Redistributive effect
0.25
0.2
0.15
0.1
0.05
0
Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Is Swedish progressivity internationally high?
Disproportionality
0.8
0.6
0.4
0.2
0
Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)
Daniel Waldenström, "Lifetime progressivity in Sweden"
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5. Lifetime tax progressivity in Sweden
• We analyze a cohort of individuals aged 20−40 in
1968
– Followed for up to 42 years
• Sum all incomes and taxes over lifetime and calculate
tax rates
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Lifetime vs annual progressivity
Disproportionality
Financial crisis effect
(very large
transfers)
20
30
40
50
60
Disproportionality (Kakwani,
K
70
80
)
20
15
10
0
10
5
0
RS
90
25
100
Redistributive effect
1970
1980
1990
2000
2010
Annual progressivity
1970
1980
1990
2000
2010
Lifetime progressivity
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Empirical findings
1. Annual progressivity trend follows inverse-U shape
2. Lifetime progressivity lower than in a single year
3. The level of lifetime redistribution low
– Inequality is reduced by a fourth (10 Gini points)
– Suggests within-lifetime redistribution
→ What can account for the observed patterns?
• Income distribution channels
• Tax system channels
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Income volatility channel:
Transitory "poverty" and Taxes as insurance
Lifetime
99
P9
999
.9
P9
9.
910
0
95
P9
5-
P9
0-
90
80
P8
0-
P6
0-
60
P4
0-
0
0
10
20
30
Disposable income shares
P0
-4
99
P9
999
.9
P9
9.
910
0
P9
5-
95
90
P9
0-
P8
0-
80
P6
0-
60
P4
0-
P0
-4
0
0
10
20
30
Market income shares
Annual average
Daniel Waldenström, "Lifetime progressivity in Sweden"
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Tax burden volatility channel:
The bottom pays higher lifetime taxes
20
30
40
50
60
70
Same annual and lifetime
tax burdens in the top
-10
0
10
Lower annual tax
burdens in the bottom
1970
1980
Top quintile - Annual
Top quintile - Lifetime
1990
2000
2010
Bottom four quintiles - Annual
Bottom four quintiles - Lifetime
Daniel Waldenström, "Lifetime progressivity in Sweden"
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6. Concluding remarks
1. Swedish taxes are high, but not very progressive
– High progressivity of the 1970's and 80's exceptions
– Why high taxes and low progressivity?
•
•
Efficient solution for welfare states
Redistribution through welfare services
2. Over the lifetime, progressivity is even lower
– Indicates redistribution within lifetime
3. Factors driving these results seem to be:
– Transitory low-incomes
– Taxes work as insurance against income shocks
Daniel Waldenström, "Lifetime progressivity in Sweden"
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