September 23, 2010

TAX WHAT YOU DON'T WANT, NOT WHAT YOU DO:

Swedish conservatives bucked the recession by lowering taxes – and won re-election (Fraser Nelson, 25 September 2010, Fraser Nelson)

When elected four years ago, leading a four-party coalition, Reinfeldt had a striking slogan. 'We are the new workers' party,' he said, meaning he would cut taxes for those in employment, but not for those on benefits. When faced with protests about how the poorest would be paying a higher marginal tax rate, he appealed to voters' innate sense of fairness - and resentment at the high level of welfare dependency. At every stage, his ministers would explain the basics of low-tax economics. Cut tax on wages, and you increase the incentive to work. 'This will increase employment,' Reinfeldt said. 'Permanently.'

Not that he was believed - at first, anyway. The party fell 20 points behind in the polls, and braced itself for the ritualistic electoral ejection. It carried on regardless, with tax cuts for cleaners and baby-sitters (most home helpers were paid 'black', as the Swedes say, because the tax was so high). Tax on low-paid jobs fell sharpest. Nursing assistants, for example, saw their tax bill drop by a fifth. The aim was to make work compete more aggressively with Sweden's famously generous welfare state.

Taxes for the rich also came down. Reinfeldt abolished the notorious wealth tax, which took 1.5 per cent a year from any Swede worth over about Skr1.5 million (£125,000). Anders Borg, the finance minister, faced predictable protests about a Bush-style tax cut for the rich. He replied: 'The big winners are, in the long term, all Swedes, because we must create conditions for companies to match global competition.' So while the Tories were endorsing Gordon Brown's plan to increase the tax on the rich, the Swedes were cutting the tax rate - in order to collect more from the well-paid. [...]

The Social Democrats' main economic argument - that tax cuts mean vicious spending cuts - was exposed as false by the Reinfeldt recovery. Ms Sahlin did not dare to propose reversing what had been the sharpest tax cuts in Swedish history. In this way, Reinfeldt has changed the political dynamic. He persuaded voters that it is possible to cut taxes, while protecting spending on schools and healthcare. The talking point in Sweden this week was that the far-right Swedish Democrats had managed to win a seat in parliament. It seemed relatively unremarkable that the Conservatives have been re-elected, and on the largest vote since universal suffrage.

Things may have come to a pretty pass when the Swedes are teaching the Brits about supply-side economics.

Posted by Orrin Judd at September 23, 2010 5:25 AM
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