Lifetime and annual tax progressivity in Sweden

Daniel Waldenström

Uppsala University

February 11, 2011, Ministry of Finance

1 Daniel Waldenström, "Lifetime progressivity in Sweden"

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" 2

2. Personal taxes in Sweden

3

Labor Municipal: 93%

State: 7%

Payroll

Consumption VAT: 71%

Capital Company: 44% Property: 15%

Other: 54%

Daniel Waldenström, "Lifetime progressivity in Sweden"

Marginal tax rates in Sweden, 2012

4 Daniel Waldenström, "Lifetime progressivity in Sweden"

02

04

06

08

0

Ma

rgin

al ta

x r

ate

(%

)

0 200000 400000 600000

Earned/capital income (SEK)

Earnings MTR Earnings MTR + Payroll tax

Capital income MTR

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" 5

4. Results: Evolution of Swedish tax-transfer rates, 1968−2009

Daniel Waldenström, "Lifetime progressivity in Sweden" 6

02

04

06

08

01

00

Effe

ctive

tax r

ate

(%

)

1970 1980 1990 2000 2010

-200

-150

-100

-50

0

Effe

ctive

tax r

ate

(%

)

1970 1980 1990 2000 2010

P0-40 P40-60

P90-95 P99.9-100

Effective tax rate = (Market inc. − Disposable inc.) / Market inc.

Financial crisis effect

05

10

15

20

25

Re

dis

trib

utive

eff

ect

(Re

yn

old

s-S

mo

len

sky,

RS

)

1970 1980 1990 2000 2010

Redistributive effect

01

02

03

04

05

06

07

08

09

01

00

Dis

pro

po

rtio

na

lity (

Ka

kw

ani,

K

1970 1980 1990 2000 2010

Disproportionality

Reymond-Smolensky index, ranking income vs disposable income

Annual tax-transfer progressivity

Daniel Waldenström, "Lifetime progressivity in Sweden" 7

Financial crisis effect

Redistributive effect Disproportionality

Is Swedish progressivity internationally high?

8

Redistributive effect

Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)

0

0.05

0.1

0.15

0.2

0.25

Daniel Waldenström, "Lifetime progressivity in Sweden"

Is Swedish progressivity internationally high?

9

Disproportionality

Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)

Daniel Waldenström, "Lifetime progressivity in Sweden"

0

0.2

0.4

0.6

0.8

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

10 Daniel Waldenström, "Lifetime progressivity in Sweden"

Lifetime vs annual progressivity

Daniel Waldenström, "Lifetime progressivity in Sweden" 11

05

10

15

20

25

Red

istr

ibu

tive e

ffect

(Re

yno

lds-S

mo

len

sky,

RS

)

1970 1980 1990 2000 2010

Redistributive effect

01

02

03

04

05

06

07

08

09

01

00

Dis

pro

port

ion

alit

y (

Ka

kw

an

i,

K

1970 1980 1990 2000 2010

Disproportionality

Annual progressivity Lifetime progressivity

Financial crisis effect (very large transfers)

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

12 Daniel Waldenström, "Lifetime progressivity in Sweden"

Income volatility channel: Transitory "poverty" and Taxes as insurance

13

01

02

03

0

Inco

me s

ha

re (

%)

P0-

40

P40

-60

P60

-80

P80

-90

P90

-95

P95

-99

P99

-99.

9

P99

.9-1

00

Market income shares

01

02

03

0

P0-

40

P40

-60

P60

-80

P80

-90

P90

-95

P95

-99

P99

-99.

9

P99

.9-1

00

Disposable income shares

Lifetime Annual average

Daniel Waldenström, "Lifetime progressivity in Sweden"

-10

01

02

03

04

05

06

07

0

Effe

ctive ta

x r

ate

(%

)

1970 1980 1990 2000 2010

Top quintile - Annual Bottom four quintiles - Annual

Top quintile - Lifetime Bottom four quintiles - Lifetime

Tax burden volatility channel: The bottom pays higher lifetime taxes

14

Same annual and lifetime tax burdens in the top

Lower annual tax burdens in the bottom

Daniel Waldenström, "Lifetime progressivity in Sweden"

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

15 Daniel Waldenström, "Lifetime progressivity in Sweden"