How do the tax burdens and tax structures affecting the top 1% of income and wealth holders differ between Nordic welfare states and liberal market economies?
Head Researcher: Samuel Rice
Researchers: Zack Ledesma, Georg Mohnen, Paul Forette, Nicholas Haslam
Editors: Oliver Cros and Joss Wildgoose Bulloch
Editor-in-Chief: Edwin Brattselius Thunfors
Executive Summary
This paper concerns itself first and foremost with the question of wealth inequality and whether modern taxation systems offer tangibly relevant differences between methods of taxation to try to curb it. It synthesises much of the academic and governmental data on taxation policies of a select cohort of representative nations, grouped loosely into “market-oriented” and “Nordic social-welfare” economies, finding that the effective rates of the top 1% are regularly far lower than the bare tax rates suggest. The takeaways of this paper are wide-ranging, offering insights into the discrepancy between how much states ought to be collecting versus how much they are collecting in reality, as well as providing a baseline for broader philosophical and political debate surrounding the justifications behind upper-class taxation.
The paper begins by contextualising the problem of wealth inequality historically and statistically, finding that the growth of millionaires and billionaires suggests that inequality is becoming an ever-increasing problem for the most developed economies. Our methodology, focused primarily on our selected comparative examples, seeks to identify the top one percent on a national level, investigating the gap between their legally binding statutory marginal tax rates and the actual effective rate paid. By looking at four market economies, in the US, Switzerland, Singapore, and the UAE, in conjunction with the three Nordic countries of Sweden, Norway, and Finland, the paper demonstrates that the paid rate is consistently lower across all systems investigated, with small variances between the categories.
In market economies, the actual design of the tax system directly benefits those of higher wealth brackets. Policies like preferential capital gains rates, different territorial income definitions, subnational tax competition, and lower penalties on wealth transfers allow the wealthiest to regularly decrease their tax burdens. Corporate tax reductions and exemptions for family businesses largely insulate top earners’ wealth from being fully taxed.
The Nordic welfare states achieve lower effective rates, in contrast, through the Dual Income Tax (DIT) system, which treats capital income at a lower flat rate while applying higher progressive rates to labour income. This is especially problematic given that the top one percent overwhelmingly draw income from capital gains rather than labour income. Consequently, the top of the tax system becomes rapidly regressive, with a larger portion of the tax burden being placed on those who pay via the statutory income taxation system.
Despite the comparative evasion at the top of the income pyramid, this paper demonstrates that the Nordic approach does effectively broaden the tax base; by minimising capital lock-in effects and providing incentives for the realisation of capital gains, the DIT does successfully generate sufficiently robust revenues to support extensive welfare systems, which do far more than strict tax policy to reduce unemployment. This is reflected in the paper’s final section, looking into wealth and exit taxes, which represent comparatively minuscule proportions of overall tax revenues despite being one of the most theoretically progressive forms of taxation.