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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"