Tax pressure in Sweden and OECD 19552002

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Tax pressure in Sweden and OECD 1955-2002
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Public expenditures in Sweden
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Why have public transfers expanded rapidly in
most modern welfare states?

• Increased demand for redistributing income over
  lifecycle
  
• Longer periods of education
• Earlier pension age
• We work shorter parts of lifetime
• Higher demand for economic security
• Demographic changes future problems

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High tax pressure and large public sector create
economic problems

• Substantial tax wedge and marginal effects
• Economic ineffectiveness and slower economic
  growth
  
• Increasing contradiction between reaching goals
  for welfare policy (giving people what they
  demand) and keeping control of public balances

5
Social- and income mobility can reduce the burden
for the public social security system

• Individuals tend to move up and down in the
  income hierarchy during lifetime.
  
• The maintenance burden also tends to vary during
  lifetime.
  
• This means that accumulated lifetime income
  automatically is more evenly distributed than
  annual incomes.
  
• The need for taxes becomes smaller if the
  government goal for redistribution is based on
  lifetime income instead of annual incomes.
  

6
One possible solution to the welfare state
dilemma Welfare accounts

• The government focuses on what the government
  must do and leaves the rest to the individual
  
• The desirable redistribution between individuals
  remains a government issue.
  
• Redistribution over lifecycle is left to the
  individuals.
  
• The public insurance policy is changed from
  covering annual income to covering lifetime
  income.

7
The main parts of a reform based on welfare
accounts

• A large part of the public social insurance
  system is lifted from the government budget.
  
• This creates a possibility for substantial tax
  cuts.
  
• This in turn means higher disposable income on
  the individual level a part of this rise is
  compulsory deposited in an individual account.
  
• Instead of getting transfers the individual can
  make withdrawals from the account in case of, for
  example, unemployment or childcare.
  
• At the end of working life the balance on the
  account is transformed to a pension annuity.
  
• The government guarantees a certain level of
  pension.

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A Welfare Account
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The main advantages

• Lower taxes and increased economic security.
• Lower marginal effects given a certain
  redistribution of income welfare policy at
  lower costs for society.
  
• Increased fairness in redistribution and lower
  incitements to cheat or to work in the black
  market.
  
• Gains from funded systems.

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A chance for the new democracies

• Reforming western modern welfare states has shown
  to be hard.
  
• It is much easier to raise than to lower taxes.
• Welfare accounts in combination with flat income
  taxation is one way to build an effective social
  security system.