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Let's talk about taxes.
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They're a big political issue, especially now.
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New York congresswoman Alexandra Ocasio-Cortez has proposed a 70
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percent marginal tax rate on wealthy Americans as part of her
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Green New Deal.
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Today is the day that we truly embark on a comprehensive agenda
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of economic, social and racial justice in the United States of
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America.
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It sounds like a big number but there's another country where
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some workers are paying similar taxes.
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Sweden.
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This Nordic country is often known for its picturesque landscape,
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ice hockey prowess, and companies like IKEA and Volvo.
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But, Sweden is also known to have some of the highest taxes in
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the world and without costing its economy.
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So how did a country with fewer than 10 million people pull it
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off?
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This is Torben Andersen.
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He's a professor with the Department of Economics and Business
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Economics at Aarhus University in Denmark.
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The short version of the story is that Sweden and the other
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Nordic countries that have high taxes.
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And they have fairly good economic performance.
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The simple explanation is that you cannot judge the effect of
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taxes without knowing what they are financing. I mean the Nordic
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countries, a large part of taxes goes to finance
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education, health and other things, in various ways actually
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support the labor supply and high employment rates.
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In other words Sweden has been able to support both high taxes
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and high economic growth because of how it spends those taxes.
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Tax revenue supports generous childcare programs, gives
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employees vast leave of absence opportunities and helps offer
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basically free higher education.
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Those programs in turn help make Swedish citizens more
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employable. They also don't have to ration big portions of their
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paychecks or things like daycare or student loans.
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that makes them better consumers.
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The average tax wedge for a Swedish worker with an average income
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is about 43 percent, but the income tax can go as high as 61.85
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percent depending on how high the income is. And
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the corporate tax rate lies at 21.4
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percent.
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What's a tax wedge, you might ask?
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It's the difference between what a worker pays in total taxes and
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what it costs to employ them.
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Basically the difference between your take home pay and your
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total pre-tax paycheck.
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It's also a measure of how taxes can drag down employment.
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Sweden has had pretty steady GDP numbers since its recession in
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2012 and during the 2008 crisis, and even before that Sweden
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suffered a severe recession back in the 1990s. And prudent
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reforms to its banking system and regulations helped it bounce
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back in a big way through the next few decades.
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Sweden now has the 12th highest GDP per capita in the world.
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In fact other high tax Scandinavian countries like Norway and
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Denmark also ranked in the top 10 countries when it comes to GDP
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per capita.
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Sweden's tax system has, of course, income taxes.
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It also has a high level of social
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contributions. And the end of the day, it's not so important
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whether the taxes are collected in one way or another.
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They're still a wedge in the labor market creating a difference
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between the cost of labor to the employer and the take-home wage
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after taxes and all social contributions to the workers.
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So for example a single worker making roughly seven hundred
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twenty six thousand Swedish krona a year in salary or about
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$78,000 in U.S.
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dollars would have a marginal tax wedge of 69.7
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percent. That percentage is nearly what Alexandra Ocasio Cortez
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is suggesting.
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But she's saying that this tax rate would apply to those making
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over $10 million dollars a year.
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Where do these tax dollars go in Sweden?
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They pay for things like childcare, health care and education.
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But if you look at an average family, yes they pay
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taxes. But then on the other hand they don't have any
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expenditures on education for the kids and so on.
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So they give out a lot of money on one hand, they also get
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appreciated services back. Of course, nothing is perfect
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but they still get value for money. And you can also see that
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politically there's very broad support for maintaining this system.
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But it's up to Swedish politicians to decide how to spend tax
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revenue.
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This is Johan Norberg.
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He's a senior fellow at the Cato Institute.
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We've got more revenue from the people so the politicians
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can put it to work where they find it most of interest to people or to themselves.
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You pay when you work and it's distributed to
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yourself when you have children or when later on when you need
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more health care or something like that.
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So it's more a redistribution within the lifecycle of people,
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more than redistribution between different groups of people from
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the rich to the poor. And so it means,
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more public services. But it also means,
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we pay for it ourselves.
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So what's the big deal against high taxes?
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In Sweden, they get you top-rated health care and higher
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education that doesn't put people in six figure debt.
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In the U.S., advocates
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for lower income taxes say they stifle economic growth and
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consumer spending.
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So we have this paradox with Sweden and the the other Nordic
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countries that taxes and taxes wedges are relatively high.
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And at the same time employment rates are high.
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So it's hard to say that taxes
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or tax wedges in themselves are causing huge negative effects of employment. That's simply not the case.
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In fact, Sweden has one of the highest employment rates with over
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77 percent of working age citizens employed as of the third
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quarter of 2018.
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To compare, the same rate clocks in at 71 percent in the United
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States. A 2012 study showed that countries with higher taxes can
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stifle entrepreneurial success.
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But that hasn't been the case in Sweden.
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Some tax dollars go into a leave of absence program that allows
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a worker to take unpaid time off while retaining job security
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and status.
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In 1998, Sweden started the right to leave to conduct a business
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operation act.
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It gives employees the right to take a leave of absence of up to
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six months to start their own company.
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That is if the company won't be a competitor to their current
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employer.
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Now, Stockholm has its own Silicon Valley.
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Several startups born there have been valued at more than a
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billion dollars.
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Like Spotify.
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Candy Crush.
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Minecraft. and Skype.
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The last two of which were bought by Microsoft.
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In Sweden, there are 20 startups for every 1,000 employees
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versus five for every 1,000 in the U.S.
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And for some of those entrepreneurs who may have come into wealth
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along the way, there's an absence of other taxes they would
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maybe have to pay if they lived elsewhere.
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Sweden is actually quite friendly to large owners of capital.
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We don't have taxes on property, no taxes on wealth, no taxes on
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gifts or inheritance.
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But instead it comes from income taxes but also
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from consumption taxes. And that's the major difference between
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Sweden and the United States.
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We have almost as much in value added taxes on consumption and
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excise taxes on different goods, as we get in income taxes.
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Somewhere between high employment rates, high taxes and support
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to those with the entrepreneurial spirit, Sweden's economy has
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stayed strong.
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Sweden though isn't immune to the ongoing global growth slowdown.
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In fact, the Swedish krona has been the worst performing major
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currency in 2019.
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I think the outlook, as for many other countries, is that growth
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will become somewhat lower.
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And of course there are many other uncertainties, also
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things happening outside Sweden or Nordic countries which
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affect Sweden. But they are sort of pretty OK compared to other
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countries.