An indirect route to equality Taxing consumers to build the Swedish welfare state
Gunnar Lantz
Economic History Umeå 2019
Detta verk är skyddat av svensk upphovsrätt (Lag 1960:729) Avhandling för filosofie doktorsexamen ISBN: 978-91-7855-073-9 ISSN: 0347-254-49 Umeå Studies in Economic History Elektronisk version tillgänglig på: http://umu.diva-portal.org/ Tryck: Cityprint i Norr AB Umeå, Sverige 2019
In Memoriam
Torbjörn Bergström
Harry Brorsson
Acknowledgements
I am grateful to a great number of people. First of all, to my supervisors Thomas Pettersson and Lena Andersson-Skog. Many others at the Department of Geography and Economic History in Umeå have contributed as well. A special mention goes to Magnus Lindmark, Ann-Kristin Bergquist, Martin Eriksson, Lars-Fredrik Andersson, Josef Liljegren, Mikael Levin, Emelie Hane-Weijman, Guilherme Chihaya da Silva and Urban Lindgren. I am grateful for input from Svante Prado, discussant at my final seminar, and from Tomas Sjögren, discussant at my mid-term seminar. The German Historical Institute in Washington D. C. enabled me to attend my first international workshop, Taxation for and against redistribution since 1945, in 2014. I am deeply thankful to the conveners Gisela Hürlimann and Elliot Brownlee for making that happen. It proved influential. I also participated in the follow-up meeting that they co-organised with Eisaku Ide in Odawara in connection to the 2015 World economic history congress. All this resulted in the book Worlds of taxation: The political economy of taxing, spending, and redistribution since 1945, published in the Palgrave studies in the history of finance series, within which I contribute a chapter based on the work on political processes presented more in-depth in this thesis.
The graduate student workshop on History and politics of public finance connected to the Social Science History Association’s (SSHA) 2016 meeting in Chicago was another influential event. I am grateful to Isaac Martin, Lucy Barnes, Molly Michelmore, the SSHA public finance network and the American Bar Foundation for that. The University of Groningen’s Globalisation and inequality summer school proved valuable in many ways too. A coffee break conversation with one of the teachers, Branko Milanovic, assured me that I was on the right track. I would like to thank Jeroen Touwen and Marijn Molema for engaged comments on early research ideas at the ESTER research design seminar in Frankfurt. Towards the end of this PhD journey, I got the opportunity to present the fruits of my work at the Sound economic history workshop in Göteborg. I extend my thanks to the participants and organisers for an event of high scholarly quality in a nice atmosphere. Sara Torregrosa Hetland helped me getting started with the practicalities of how to conduct inequality and tax incidence calculations. That was a great help. Kristoffer Collin gave me a literature tip early on that unexpectedly opened the door to a whole new avenue of research. I guess he did not foresee those consequences at the time either, and he probably has no idea about it today. Such is life. Others whom I have talked to and gained valuable input
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and literature recommendations from include Petri Roikonen, Per Andersson, Glenn Sandström, Oriol Sabaté and Sara Moricz. And when it comes to Cristián Ducoing Ruiz, well he is simply a great guy. I would like to thank Thomas Blanchet for taking the time to answer my questions and upload a workaround for how to use his R package for generalized Pareto interpolation via Stata. I would also like to thank the staff at Statistics Sweden (SCB) for their assistance and Mikael Stenkula at Institutet för näringslivsforskning for sending me the data used in the book Swedish taxation: Developments since 1862.
Funding was received from Johan och Jakob Söderbergs stiftelse, Wallenbergsstiftelsens fond (Kungliga vitterhetsakademien) and J. C. Kempes minnes stipendiefond. Parts of the work on tax incidence were adapted into an article titled ‘Letting the masses pay for the welfare state: Tax regressivity in postwar Sweden’, which has been peer-reviewed, revised and resubmitted for publication in the European Review of Economic History. If we move outside of academia, I am grateful to many from my previous life in journalism, Torbjörn Bergström, Kerstin Berggren, Henrik Klingberg, Christer Jansson to name a few, who taught me a lot about everything. I am grateful to my parents and all those others like Månsan and the Teljebäck- Högstadius family who formed the environment within which I grew up and the ground underneath my feet on which I am still standing firmly today. I am grateful to my love Ewa.
Umeå, April 2019
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Contents
Acknowledgements ...... iii Figures ...... vii Tables ...... viii Abstract ...... ix Abbreviations ...... x Terms...... xi Symbols ...... xii 1. Introduction...... 1 1.1 Contribution of thesis ...... 8 1.2 Fiscal pathways in the postwar period ...... 11 1.3 Swedish tax politics ...... 15 1.4 Two problems ...... 18 1.5 Aims and research questions ...... 19 1.6 Outline ...... 19 1.7 Theory ...... 20 1.8 Methods and delimitations ...... 24 2. Inequality and taxation: Methods and previous work ...... 29 2.1 All eyes on tax returns? ...... 30 2.2 Incomes and progressivity ...... 40 2.3 Data availability ...... 50 2.4 Interpolation and extrapolation ...... 54 2.5 Consumption expenditure ...... 64 2.6 Consumption taxes ...... 66 3. Tax regressivity in postwar Sweden ...... 69 3.1 Consumption and payroll taxes as a counterweight ...... 70 3.2 Conclusions ...... 79 4. Explaining the postwar path: The literature ...... 83 4.1 A formative era ...... 84 4.2 Potential explanations ...... 85 4.3 Institutional structure and organised interests ...... 86 4.4 Public attitudes and the role of technocracy ...... 90 4.5 Country-level taxonomies...... 96 4.6 Bringing the temporal dimension in ...... 100 4.7 Mechanisms of institutional change ...... 103 4.8 Implications for design of study ...... 104 5. How they all stopped worrying and learned to love the VAT ..107 5.1 Research design ...... 107 5.2 A corporatist legislative process ...... 112 5.3 Sales taxes in Sweden ...... 116
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5.4 The fiscal setting of the 1950s ...... 116 5.5 Sceptics left, right and centre ...... 118 5.6 Consolidating the sales tax while meeting business interests halfway...... 128 5.7 International relations ...... 136 5.8 Conclusions ...... 142 5.9 A UK connection: Daunton’s account in comparison ...... 146 6. Concluding discussion ...... 153 6.1 Consumption taxes key in tax fairness analysis ...... 153 6.2 Institutional factors behind the rise of VAT ...... 155 6.3 Economic factors behind the rise of VAT ...... 156 Sammanfattning på svenska...... 159 Skatteprogressionen i Sverige 1958—2012 ...... 161 Politiken bakom den svenska momsen ...... 161 References ...... 163 Appendix ...... 175 Interpolation and extrapolation ...... 175 Using historical household surveys ...... 176 Income concepts and specification of tax variables ...... 180 Stata code for bottom-income extrapolation ...... 183 Tables ...... 186
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Figures
Figure 1. Two conceptions of income levelling through fiscal policy...... 2
Figure 2. Swedish taxes since the 1860s as per cent of GDP...... 12
Figure 3. Tax categories by total revenue, various OECD 1965 and 2010...... 13
Figure 4. General consumption tax, rate and share of total tax, 1960–2010...... 14
Figure 5. Selected tax reforms, by year of decision...... 16
Figure 6. Inverted Pareto coefficients from group-level data, 1958 and 1969...... 59
Figure 7. Factor income, sample microdata versus interpolated group data 1969. .... 64
Figure 8. Tax revenue categories as per cent of total revenue, 1958–2016...... 69
Figure 9. Average effective tax rates by factor income (%), 1958–2012...... 71
Figure 10. Tax categories of total tax (%), factor income deciles, 1958–2012...... 72
Figure 11. Kakwani indices, factor income, 1958–2012...... 74
Figure 12. Reynolds-Smolensky indices, factor income, 1958–2012...... 75
Figure 13. Factor income Gini coefficients before and after tax, 1958–2012...... 76
Figure 14. All indices, factor and taxable transfer income, 1958–2012...... 77
Figure 15. Tax rates by factor and taxable transfer income (%), 1958–2012...... 78
Figure 16. Factor income tax rates (%), sorted by consumption, 1958–2012...... 80
Figure 17. Vertical–horizontal equity and employee–employer interest...... 109
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Tables
Table 1. Two strands of scholarship on twentieth-century fiscal research...... 5
Table 2. Data availability, whether digitised microdata or income group averages. ... 51
Table 3. Potential factors behind postwar regressive taxation...... 86
Table 4. Text coded according to the following categories...... 110
Table 5. General structure of contents of tax committee documents...... 113
Table 6. Members of official commissions of inquiry...... 115
Table 7. Taxes by factor income (SEK), percentile group averages, 1958...... 186
Table 8. Taxes by factor income (SEK), percentile group averages, 1969...... 188
Table 9. Taxes by factor income (SEK), percentile group averages, 1978...... 190
Table 10. Taxes by factor income (SEK), percentile group averages, 1985...... 192
Table 11. Taxes by factor income (SEK), percentile group averages, 1995...... 194
Table 12. Taxes by factor income (SEK), percentile group averages, 2005...... 196
Table 13. Taxes by factor income (SEK), percentile group averages, 2012...... 198
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Abstract
The question of who paid for the welfare state in postwar Sweden has been subject to extensive debate. Many have focused on the comparatively high, and steeply progressive, taxes on income. Others have claimed that low and middle earners paid disproportionately more, pointing to the comparatively high revenue share of value added tax (VAT) for instance. No convincing assessment has been made of the extent to which consumption taxes counteracted the progressivity of income taxes. The thesis presents new estimates based on tax assessments and household surveys, which show that consumption taxes did offset tax progressivity considerably. Moreover, they were important even before the VAT. There was not a sharp break, but a gradual transition from excise and customs duties to general sales tax to VAT. The VAT meant a shifting of the weight more towards the lower end of the income distribution. This insight begs the question of what caused such a fiscal arrangement. What made postwar Sweden’s labour governments favour a tax that fell disproportionately on low earners, a core part of their constituency? Through an analysis of policy documents, the author shows that the governing Social Democrats were well aware of the dilemma. The party leaders used general consumption taxes explicitly as a ‘lesser evil’ component in a strategy for expanding the public sector and welfare systems. That aspect has previously been neglected when telling the story of this formative era. The thesis demonstrates that it deserves to be brought into a central place in that story. Corporatism remains a valid explanatory factor. The business community had an influence on determining the details of the general sales tax, albeit not the overall level. Tax reliefs on certain important inputs such as building materials and were granted after a series of appeals. The author argues that the transition from sales tax to VAT can be seen as a final solution to these protests about business inputs being unfairly taxed. The will of the domestic business community was of a more direct importance for the switch to VAT than any potential tendency of compliance towards supranational organisations such as the EEC pushing the government to follow their edicts concerning VAT, as has otherwise been suggested. The political left in Sweden was initially against the general sales tax because of its burden on low earners. The political right opposed the general sales tax because it would increase the overall tax take, and risked becoming an all too convenient revenue machine for the government. The left changed position and began framing it as a tool for realising welfare state expansion. The right reframed it as a tool for keeping the progressivity of taxation down.
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Abbreviations
EEC European Economic Community
EFTA European Free Trade Association
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
LO Confederation of Trade Unions (Landsorganisationen)
MP Member of Parliament
SAF Swedish Employers’ Association (Svenska arbetsgivare- föreningen)
SEK The Swedish currency unit krona/kronor.
VAT Value Added Tax
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Terms
Direct tax
Directly related to the level of income or wealth.
Factor income
Earned income and capital income, compensation to the factors of production (or their owners).
General consumption tax
Umbrella term for consumption taxes levied on all or nearly all purchases, such as VAT and sales tax.
Government
Encompasses governments at national and subnational levels, unless context makes it clear that the term refers to the national government in particular.
Indirect tax
Used as a synonym to consumption tax. The term indirect tax might in other contexts be more broadly defined to include taxes levied on the inventories of companies, and even payroll taxes, with the motivation that these work to extract revenue from businesses indirectly via the value of either factor of production. In this thesis, payroll taxes are instead defined as taxes on the earned income of employees.
Payroll taxes
Used synonymously to the broader category of payroll taxes and social security contributions, unless otherwise stated.
Social security contributions
Used synonymously to the broader category of social security contributions and payroll taxes that are not tied specifically to social security, unless otherwise stated.
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Symbols