Research shows that the wealthiest pay less tax

In the article, the researchers behind the study highlight the principle underpinning the Swedish tax system: the more you earn, the more tax you should pay. However, this principle does not hold at the very top of the income distribution. Instead, the wealthiest 0.1 per cent – around 5,000 households – pay an average of just 20–25 per cent in tax.

In the study, the researchers calculate household economic income more broadly than in standard income statistics. Retained earnings in companies are also counted as income. The results show that high-income earners pay around half of their income in tax, while the share falls sharply at the very top of the income distribution.

According to the researchers, this is not due to lower tax rates or tax evasion, but rather to the fact that the wealthiest derive a large share of their income from ownership in companies and corporations, which is not taxed under the rules for personal income taxation.

The study shows that only a small share of retained earnings is distributed to owners, even over longer periods. Most of the earnings remain within the corporate structure and can instead be used for investments in, for example, shares, real estate and other assets. This allows income to grow without first being taxed as personal income for the owner.

“As a result, households at the very top of the income distribution effectively pay only corporate tax, while employees’ earnings are subject to municipal and state income tax and are also subject to employer social security contributions paid by the employer,” the researchers write in Dagens Nyheter.

They also point at the fact that this gap has widened over the past two decades. Personal holding companies have become more common among the wealthiest, while their effective tax rates have fallen. For the majority of Swedish households, taxation has remained considerably more stable.

The researchers suggest several possible solutions to the problem: introducing a well-designed tax on very large fortunes; broadening the personal income tax base to include retained corporate earnings; or reducing taxes on labour sufficiently to eliminate the difference between employees and the wealthiest.

“The Swedish tax debate focuses too much on tax rates and too little on which types of income are actually taxed,” they conclude in the article.