The Economic and Fiscal Consequences of a Capital Income Tax Reduction in Sweden

Tasks

Sweden was among the first countries in Europe to introduce a dual income tax. Since a comprehensive tax reform in 1991, a progressive tax scheme is applied to income from labor while capital income is taxed at a constant rate of 30%. Since the reform, however, the global economic environment has changed notably. The increase in global economic integration has intensified the international competition for mobile capital. As a result, many countries have significantly reduced the tax burden on capital and capital related income. Today, that is, 28 years after the extensive Swedish tax reform, Sweden effectively levies higher taxes on capital income than many other countries in Europe and the rest of the world.

The aim of this report is to examine the long-term consequences of a reform of capital income taxation in Sweden. We analyze the effects of a reduction in the capital income tax on key macroeconomic aggregates, including gross domestic product (GDP), investment and employment, and tax revenues.

Methods

The economic and fiscal consequences of a long-term reduction in capital gains tax are estimated using a dynamic simulation model that takes the behavioral responses of economic agents and the interdependencies between the different sectors of the economy into account.

Results

The results suggest that a reduction of the capital income tax rate would boost economic activity in Sweden: The capital income tax cut would lead to an increase in GDP by about 3.1% in the long-run. The main driver behind this rise in GDP is an in-crease in private investment by roughly 6.5%. In addition, employment rises modestly by about 0.7%. Regarding the fiscal consequences, the authors find that the fiscal costs associated with a capital income tax reduction tend to be low. Due to the boost in economic activity, the decrease in revenues from the capital income tax is partly offset by an increase in revenues from other taxes, especially the labor income tax and the value added tax. Overall, the drop in total tax revenues amounts to roughly 0.2%.

Publication

Clemens Fuest, Florian Neumeier, Michael Stimmelmayr and Daniel Stöhlker The Economic and Fiscal Consequences of a Capital Income Tax Reduction in Sweden , ifo Institute, Munich, 2019  PDF Download