History of the Swedish tax system
From the beginning of the 20th century to the great tax reform.
Our tax system has evolved gradually and changes have occurred in every period. At the beginning of the 20th century, tariffs and excise duties (selective taxes) were the state's main source of income. Property taxes were levied on ownership of land but were abolished early in the century. In the place of property taxes, the state introduced progressive income taxes. The total tax take, the tax ratio, has increased relatively quickly. At the beginning of World War II, indirect taxes on goods and services again became an increasingly significant source of state revenue and the social insurance contributions charged also rose sharply.
The Municipal Tax Act was established in 1928 and remained the key tax law until the Income Tax Act came into force in 2000. The National Income Tax Act from 1947 referred extensively to the Municipal Tax Act.
The main features of our present system for paying taxes came into being in 1947, when tax collection at source was introduced and employers were made responsible for deducting taxes before paying wages. Later, in 1985, the collection of income taxes and social insurance contributions was coordinated and in 1993 the F-tax card (for business tax status) was introduced, which brought clearer rules on the obligation to pay employers' social insurance contributions.
The general sales tax, which had been introduced in 1960, was replaced by value added tax in 1969.
At the beginning of the 1970s, the joint taxation of married couples' incomes was abolished, as was the right to deduct local government tax when calculating state income tax. The intention was to make it more attractive for a spouse remaining at home to enter the labour market. The differentials in local government tax rates began to make more of an impact on the personal finances of residents, leading to increased pressure on municipalities and county councils to make their activities more efficient. The income tax changes were financed by higher value added tax.
In the 1980s tax bases were gradually broadened. The right to deduct interest payment expenditure was limited as was the impact of such deductions on the tax take. The marginal effects of taxation were moderated. Prior to these changes, the marginal tax rate had been very high even at relatively normal income levels.
The 1990 tax reform
The most extensive change to the Swedish tax system in modern times was the major tax reform carried out during the period 1990-1991. The aim was to make the tax system fairer and more efficient. The method applied was to broaden tax bases and to reduce tax rates. In order to achieve greater fairness and make tax planning less attractive, efforts were also made to achieve greater uniformity in the taxation of different types of income.
The most important features of the reform were as follows:
- Fringe benefits, which had previously been declared at a considerably lower value than their market value, were to be taxed for the full amount. By taxing them at full value, taxes on different types of income were also evened out.
- State income tax was only to be levied on income above a certain level, the 'threshold'. Income earners with incomes up to the threshold only pay local government income tax. The state tax rate was set at 20 per cent and the local government tax rate was on average 30 per cent. This made the highest marginal tax rate 50 per cent.
- Taxation of income from capital was separated from taxation of income from work. A proportional tax of 30 per cent was levied on income from capital. This was made a purely state tax.
- Value added tax came to cover most types of services. Previously it had only covered goods and a few services. The only tax rate after the reform was 25 per cent.
- The corporate tax rate was reduced from 52 per cent to 30 (later 28) per cent. The possibility of transferring profits to untaxed reserves was also restricted.
- Tax on fuels was raised when the carbon dioxide and sulphur taxes were introduced. This helped to finance the reform.
The tax reform meant that parts of the tax take were transferred from one tax base to another. Natural persons' income from work accounted for a smaller part of the state tax base since state income tax was only to be levied on income above the threshold, while turnover of goods and services increased in importance. The local government tax base was increased. The same applied to the social insurance sector. Reduced corporate tax in combination with the broadened base resulted in an unchanged outcome for the corporate sector as a whole. At the same time, the effects on different industries varied considerably.
The main features of the tax reform have been kept. The most significant individual changes are the introduction of an additional step in the income tax scale for state income tax of 25 per cent on income above an upper threshold, and the differentiation of value added tax so that there are now three different tax rates (over and above zero tax rate).