lördag 23 augusti 2008

Black becomes white in Sweden

Black & White dog Borry
Originally uploaded by andzwe

Two years after being elected, the Swedish coalition government is planning a raft of tax reforms. There are to be reductions all round and “black” work is to become legal. Sweden spends a lot on public services, over 50% of GNP being in the public sector. If it is going to improve its defences as well, it is going to have to spend a lot more. So how is this going to work?

Presumably somebody has been reading Laffer, who devised the famous Laffer curve which shows that tax yields reach a maximum at a certain rate of tax and decline if tax rates are higher. There is some truth in the argument; it would be expected on theoretical grounds, as most taxes give rise to a deadweight loss, consisting of production that would take place were it not for the tax. The effect takes place at the margin, in that taxation at locations close to the margin has the effect of knocking enterprises at those sites out of production by rendering them unprofitable. For this reason there should be a further benefit from tax cuts in that unemployment ought to come down and with it the costs of paying out benefits. The trouble with Laffer is that the theory is simplistic. It ignores the simple and obvious fact that the effects of taxes depend on what is taxed. Taxes on windows lead to bricked-up windows. Taxes on alcohol and tobacco lead to less smoking and drinking. Taxes on work lead to idleness. A tax on the rental value of land leads to – what?

It may be that lower rates of taxes in Sweden will increase the yield but time will tell. But what will certainly fail is the plan to make “black” work “white”. Of course it is wrong to tax people’s labour. But the tax system can be compared to a net. If holes are cut in it, for instance, by making concessions, this gives people opportunities for legal tax avoidance, and they will take advantage of them.

The only way round this is to phase out taxes on labour, goods and services altogether, and to replace these with a tax on the rental value of land. The yield from such a tax is buoyant and avoidance and evasion are impossible. As long as the timetable for the change is realistic and the land value tax is not an additional tax, the flow of revenue is sustained and business flourishes.

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