ON TAX REVENUE

Upsala Nya Tidning asks a relevant question in todays editorial "Vem skall baka kakan?" (Who's going to bake the cake?). The tax burden affects people's decisions and so you can't raise or lower taxes as if the tax system existed in a vacuum. It doesn't.

The Swedish Social Democrats are now talking about raising taxes in order to secure future financing of the welfare systems. At the same time they consider lowering the open unemployment to 4 per cent as being a crucial issue to solve. Apparently they don't see the conflict that may arise between these two goals. A closer look reveals that perhaps that isn't so odd. The key word is open unemployment - that means that people put in programmes doesn't count and since these programmes are funded by taxes perhaps it makes sense after all. Of course one might think that it's a waste of money to put people through programmes if these programmes doesn't lead to the people getting jobs, but nice looking statistics seem to be the top priority of this government.

Of course it isn't the tax burden that determines what amount of money the state can spend at welfare. Rather it's the total tax revenues - simply speaking the amount of money that the state can collect. Fundamentally, in the short run, there are two ways to increase tax revenues: one is to raise taxes and increase the tax burden and the other is to increase the amount of money being taxed (that is, increasing the GDP basically).

In the short run both of these methods works perfectly fine, though it's easier to increase the tax burden than it is to quickly increase production. However, on the long run things are a bit more complicated. Over time, to maximize tax revenue (if that is indeed what you want to do) a balance between the two will have to be struck. Every time you increase taxes on income, for instance, it becomes less worthwhile to actually work. If the money collected is then spent on various forms of welfare system (meaning that you can survive easier without money) that makes it even less worthwhile to work. Tax too little and you won't afford the welfare system you feel is important and fair, but tax too much and you'll get into the same situation anyway. As it becomes less worthwhile to work fewer people will indeed work (and instead their consumtion will come from other's work, in the shape of subsidies) which means that the production decreases.

This means that even if the state increases the tax burden to 60% or 70% the tax revenues won't necessarily increase in the long run. After all 50% of 200 is more than 75% of 100. Exactly where this balance lies is difficult to determine but it seems obvious that it's way lower than where we're currently at, with a tax burden of 51% and an average income tax level for those with a low wage of about 63%. Not surprisingly this also means a fairly high unemployment (if you actually count those openly unemployed and those in programmes) of 8-10%.

Unfortunatly the government seems to have failed to grasp these fundamental things. They've always trusted on the first method of raising taxes, and never realised it's long term effects. That's why they are so unprepared and unable to find a solution when they realise that despite the high taxes the cake doesn't seem to be big enough. Like a reflex they talk about raising taxes even further. That would only make things worse.

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