Capital Income Taxation and Progressivity in a Global Economy
Lifetime and annual tax progressivity in Sweden · Marginal tax rates in Sweden, 2012 Daniel...
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Lifetime and annual tax progressivity in Sweden
Daniel Waldenström
Uppsala University
February 11, 2011, Ministry of Finance
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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
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2. Personal taxes in Sweden
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Labor Municipal: 93%
State: 7%
Payroll
Consumption VAT: 71%
Capital Company: 44% Property: 15%
Other: 54%
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Marginal tax rates in Sweden, 2012
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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
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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
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4. Results: Evolution of Swedish tax-transfer rates, 1968−2009
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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
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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
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Financial crisis effect
Redistributive effect Disproportionality
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Is Swedish progressivity internationally high?
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Redistributive effect
Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)
0
0.05
0.1
0.15
0.2
0.25
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Is Swedish progressivity internationally high?
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Disproportionality
Note: Progressivity scaled by pre-tax Gini. Source: Verbist (2004, Euromod)
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0.2
0.4
0.6
0.8
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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
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Lifetime vs annual progressivity
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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)
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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
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Income volatility channel: Transitory "poverty" and Taxes as insurance
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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
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-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
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Same annual and lifetime tax burdens in the top
Lower annual tax burdens in the bottom
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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
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