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Opinion: Canada is making mistakes Sweden fixed long ago

After high-profile tax horror stories in the 1970s Sweden switched to smart taxation: higher consumption tax and lower, flatter income tax

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In economic debates, Sweden is often in the eye of the beholder. Though now one of the most capital-friendly tax jurisdictions in the world, it is still often treated as the high-tax welfare state it once was. I have advised on Swedish tax law for decades. Some of my clients left the country when taxes became punitive but then returned after reform. I fear Canada will lose more and more economic contributors until it adopts similar reforms.

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A Swedish Social Democratic finance minister once observed — quite correctly — that capital is a friend of labour: it makes labour productive. Yet as Social Democrats came to dominate Swedish politics in the 1970s and 1980s, they sought to demonstrate fairness by redistributing from high earners.

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In 1976, Astrid Lindgren, author of Pippi Longstocking, faced an effective tax rate on her royalty income that exceeded 100 per cent. Advised by the finance minister to incorporate, she refused — she would not pay more than she earned. A satire she wrote about her predicament, Pomperipossa in Monismania, helped topple the government. (Pomperipossa was a character from a Swedish fairy tale. Thanks to Lindgren, the “Pomperipossa effect” now refers to paying taxes at more than 100 per cent.)

When Sweden’s wealthiest woman, Sally Kistner, died in 1984 her estate was forced to sell shares in the pharmaceutical company Astra AB to pay inheritance tax, though that triggered capital gains tax. Anticipating a flood of shares, the market fell. The estate ultimately went bankrupt under the tax burden.

In that era, corporate tax rates were around 60 per cent, though legal tax accounting tricks could reduce taxable income, albeit at the cost of encouraging inefficient behaviour like holding excess inventories. Many high-net-worth individuals I advised around that time relocated to more favourable jurisdictions, though their departures were usually attributed to family reasons.

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In a small way I may aided subsequent Swedish tax reform. One of my clients in real estate decided he should be candid about his impossible tax situation. If a brick fell on his head, he told reporters, nothing would remain for his family: the tax man would take it all. The story made headlines. Even trade union leaders entered the debate on his side. The “falling brick” became a turning point, forcing recognition that punitive taxation has real costs.

The 1990–91 tax reform was Sweden’s pivot point. Top marginal labour taxes were cut by a third. Capital income and gains were taxed at a flat 30 per cent. Corporate taxes were reduced. Crucially, the reform was revenue-neutral: not “tax less” but “tax smarter.” Even the Social Democrats supported it, as capital flight had become undeniable. But many who had left returned after the changes went through, including IKEA founder Ingvar Kamprad.

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Reform has continued. In 2012, Sweden introduced an investment savings account, similar to the Canadian TFSA though without contribution limits and taxed through a modest annual yield tax rather than itemized reporting. Angel investing through a corporation has been supported by exempting dividends and capital gains on unlisted shares. Employment-linked dividend incentives favour job creation over formal notions of “fairness.” Bottom line? Sweden now encourages capital to stay in the country and be invested domestically.

Sweden’s 25 per cent value-added tax has proved more efficient and less distortionary than high income taxes were, creating room for reform. Canada’s HST/GST currently tops out at 15 per cent, which means there is room to move, with targeted rebates to protect lower-income households. As a rule, consumption taxes are easier to raise when income taxes are reduced in tandem.

Like a falling brick, circumstances made clear to Swedes that high taxes change behaviour. When will circumstances persuade Canadians of that?

Terms like “fairness” and “inclusivity,” now common in political rhetoric, do not in themselves generate growth. The C.D. Howe Institute recently published Big Bang Tax Reform, by Jack Mintz, Alexandre Laurin and Nicholas Dahir, which calls for a tax system that prioritizes productivity, investment and entrepreneurship.

Canada needs to go bold. Tax fairness needs to be re-examined in the context of growth. Canada should also ensure its tax system encourages capital to remain and be invested domestically. This may require accepting somewhat greater income disparity if it leads to higher overall living standards.

An inconvenient truth is that when income barely covers daily needs, there is little room for tax planning. Canada should learn from the mistakes Sweden has already corrected. Inequality cannot be eliminated through taxation alone: those affected adapt by producing less, investing elsewhere or leaving.

At this point, Canadian tax policy should focus on growth. A system that attracts capital, encourages investment and raises productivity will make more income available for redistribution later. But without stronger growth, Canada faces a simple reality: you cannot redistribute prosperity that has not been created.

Harry Margulies is a Swedish-trained tax adviser, author and former lecturer at Lund University who has lived and practised across Sweden, Canada and the United Kingdom.

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