Thursday, September 13, 2012

The Swedish government will lower the corporate tax rate to 22 percent

Stockholm Sep. 13, 2012
The The Swedish government will lower the corporate tax rate to 22 percent, from the current 26.3 percent. The reduction applies from January 1, 2013.

The reform is expected to be financed partly by the tighter deduction rules for the internal interest. The Swedish government says that: "The significant reduction in the corporate tax rate is expected to strengthen the investment climate and growth in Sweden." To further strengthen the conditions for entrepreneurs the Swedish Government announced that it will introduce an investment deduction. This will allow natural persons investing in businesses to make a fifty percent deduction in their tax return.

Prime Minister Fredrik Reinfeldt said at a press conference that the entire year's budget work has been done in an environment where "Sweden is different from the rest of Europe. We are in a position where we can discuss how we can strengthen Sweden's competitiveness. An important part of this is the corporate tax rate, which is now lowered." It is "probably the most harmful tax of all," he said. 

Corporate tax is clearly in focus even for governments that may not have room to lower it, but they choose to lower it anyway to enhance competitiveness, for it is "extremely important for investment," he said.

The minister for enterprise Annie Lööf said that after cutting the corporate tax rate Sweden is below the average for both the OECD and the EU, and it strengthens the conditions for higher employment and higher growth.

Monday, September 10, 2012

US should learn from how big government damaged Swedish society

The Swedish author Nima Sanandaji has produced a new report in defense of the free markets. He shows that an over-bearing welfare state, along with high taxes, has damaged the economy in Sweden as well as undermining its social capital. It suggests that it is only through focusing on increasing economic freedom and introducing more choice in public services that the Alliance for Sweden has rebuilt the country's economy.  This report contradicts everything that Democrats believe about Sweden.

Here is a summary:

Sweden did not become wealthy through social democracy, big government and a large welfare state. It developed economically by adopting free-market policies in the late 19th century and early 20th century. It also benefited from positive cultural norms, including a strong work ethic and high levels of trust.

As late as 1950, Swedish tax revenues were still only around 21 per cent of GDP. The policy shift towards a big state and higher taxes occurred mainly during the next thirty years, as taxes increased by almost one per cent of GDP annually.

The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialized country in terms of GDP per head. By 1993, it had fallen to 14th.

Big government had a devastating impact on entrepreneurship. After 1970, the establishment of new firms dropped significantly. Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.

High levels of equality and favorable social outcomes were evident before the creation of an extensive welfare state. Moreover, generous welfare policies have created numerous social problems, including high levels of dependency among certain groups.

Descendants of Swedes who migrated to the USA in the 19th century are characterized by favorable social outcomes, such as a low poverty rate and high employment, despite the less extensive welfare state in the USA. The average income of Americans with Swedish ancestry is over 50 per cent higher than Swedes in their native country.

Third World immigrants have been particularly badly affected by a combination of high welfare benefits and restrictive labour market regulations. In 2004, when the Swedish economy was performing strongly, the employment rate among immigrants from non- Western nations in Sweden was only 48 per cent.

Since the economic crisis of the early 1990s, Swedish governments have rolled back the state and introduced market reforms in sectors such as education, health and pensions. Economic freedom has increased in Sweden while it has declined in the UK and USA. Sweden’s relative economic performance has improved accordingly.

Download the report here

Sunday, September 2, 2012

The Swedish healthcare model has a grim outlook

The Swedish welfare state is forcing its citizens to pay 44.4 percent in tax revenues on the gross national product to pay for its from cradle to grave entitlements. Compared to the U.S. tax burden of only 24.8 percent its a staggering number. The tax pressure on the Swedish middle class exceeds 60 percent and this is not enough to cover the shapely raising costs for the socialized healthcare system.

The Swedish socialized healthcare model is a proof of that the ObamaCare system is an utopian idea. The Health care bill in Sweden is growing steadily every year. A sharp increase by 13 percent more in tax, or significantly increased fees will be necessary to meet the needs, according to the Swedish economists Stefan Ackerby. To increase the tax pressure up-to 74 percent on the middle class would be impossible. But the political class making the decisions shy away from taking a stand. 

Each year the Swedes pay more money on health care. Between 1993 and 2008 health care spending increased by 70 percent (from 149 billion to 256 billion Krona in real terms). This represents an increase from $2,700  to $4,230 per Swede. Anders Klevmarken, emeritus professor of econometrics, and Björn Lindgren, professor emeritus of health economics, has analyzed the demographic change and concludes that health care costs could increase by another 270 percent by 2040 – that is almost a tripling of spending. Such an increase would mean that every Swedish need to shell out an additional $8,500 per year, or $710 per month. This impossible to pay for the Swedish middle class. In debate variations of private funding are proposed, since its almost impossible to increase the tax burden. It may be through higher fees when you go to the doctor, or the cost ceiling will be raised.

Already now Swedish patents has to pay all kinds of non-deductible fees up to $1,000 altogether. And the social health insurance does not cover the fees per day when hospitalized. The worst effect of the socialized health care system is the rationing causing patients to wait in line for month, if they can survive, to receive the treatment they are imagining that have paid for to get instantly. For the citizens that are better off its common to buy a private insurance for medical treatment in time, which is the smart way to go ahead in the queue. Since 2007, the market for private health insurance increased sharply by 58 percent. Medical insurance is paid to 80 percent by employers and as a benefit for employees. From an employer's perspective, private health insurance makes it possible for the employee to quickly return to work, thus reducing production loss. For the employee, a private health insurance contribute to a faster recovery and increased security for the economy and health.

After half a century of big socialist government and lack of personal accountability Sweden is in fact gradually forced to move away from the direction the USA is moving towards. The Americans are moving towards less economic freedom and a destroyed foundation for economic growth. The citizens of U.S. are risking the same development as the Swedes faced between 1960 and 1990, when income taxes for the average Swede doubled from approximately 30 to 60 percent. Is ObamaCare something the American middle class is willing and prepared to pay for?

Wednesday, May 23, 2012

No they can't! Why big government in Sweden has failed

What can U.S. learn from Sweden in the past and its contemporary move towards Neoliberalism? The dominating picture of Sweden as a successful far left socialist society does have very little to do with reality. The absolute truth is that the Swedish Socialist Democratic party has failed to deliver on its utopian egalitarian promises. Though the Swedes are dissatisfied with the outcome of most socialist reforms many still believe in economic equality.

After years of expensive socialist experimentation and a constant growth of government the people finally voted 1991 for a change in direction. The conservative party Moderaterna formed a coalition government based on the principle that the time of collectivism was out and that the society should be greater than the state. Unfortunately the right-wing government inherited an economy in severe decline. Sweden was in a deep recession between 1991 and 1993. From the 1970's to the beginning of the 1990's the Swedish GDP growth had fallen behind the other industrialized countries and the purchasing power adjusted GDP per capita fell relative to other industrialized countries in recent decades, from a fourth place in the 1970s to a 14th place in the 1980's. In lack of a coordinated political coalition program, and some racist statements by the conservative party, the Swedish Social Democratic Workers' Party managed to form a minority government after the 1994 election.

Experienced by the damage the right ring parties formed the "Alliance for Sweden" that led to success for the Conservatives (Moderaterna) in the 2006 election and change of government. Unfortunately after 70 years with mostly socialist governing the Swedish mindset has been characterized by a strong egalitarian belief. During the 2006 campaign the new right ring alliance presented a less socialistic alternative (compared to the traditional socialist party program), and changed the language toward a more socialistic terminology. The Conservatives' (Moderaterna) slogan was striking: "We are the new workers’ party." The formula has obviously worked since the Alliance for Sweden won the election in 2006 and was reelected in 2010. Since 2006 Sweden is making tax cuts and has a libertarian finance minister, Anders Borg, who was named the most effective finance minister in Europe by the Financial Times.

Sweden is not known for tax cuts and schools established on private initiatives. While big government Obama has been driving down the U.S. economic freedom ranking over the past three years, by sharp contrast Sweden’s highly efficient regulatory system, have raised its country's economy (in the 2012 Index of Economic Freedom). President Obama need to sit down with Sweden's finance minister Borg for a lesson on how to achieve a real economic recovery.

Borg’s mission has been to reduce the Swedish government. His “stimulus” was a permanent tax cut. To the critics this was fiscal lunacy — the so-called “punk tax cutting” agenda. Borg, on the other hand, thought lunacy meant repeating the socialist economics of the 1970s and expecting a different result! Three years on, it’s pretty clear who was right, according to Borg. “Look at Spain, Portugal or the United Kingdom, whose governments were arguing for large temporary stimulus.” “Well, we can see that very little of the stimulus went to the economy. But they [the PIIGS countries] are stuck with the debt.” Tax-cutting Sweden, by contrast, had the fastest growth in Europe year 2011, when it also celebrated the abolition of its deficit. Borg continued to cut taxes and welfare-spendings to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular among the left, but for Borg, economic recovery starts with entrepreneurs.

Borg mean that, if cutting taxes for the rich encouraged risk-taking, then it had to be done. "In most cases, the company would not have been created without the owner," he says. "There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs [Sweden] have had in the last few decades, and both moved out of Sweden."  Borg believes that a high wealth tax and an inheritance tax, makes people to emigrate because it becomes too costly to own a company in such an environment. Ownership is a production factor. Entrepreneurs are a production factor. And his godson tells that, "these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation."

Sweden is the unlikely champion of (Ronald Reagan) supply-side economics, with ideas now-days too radical for most Americans. There is a cross-party support in Sweden for profit-seeking state schools, which Obama won’t attempt. Borg’s tax-cutting policy was accompanied by a 268-page book explaining the dynamic link between lower taxes and more jobs. Such a document would be unthinkable from big government Obama.

In 1991, the right-wing government passed a law in Sweden that allowed new schools to be established on private initiatives. Today parents, teachers, charities and private businesses, can start their own school in competition with existing government operated schools. Not only did the reform create new, higher-performing schools, it also spurred improvements in old institutions forced to compete for pupils. 

The Swedish school system is also one of the world's most liberated. Only Chile's school system is on a similar level. What's completely unique is that the Swedish government doesn't care who owns the school. In twenty years Sweden went from one of the world's most regulated school systems on this planet to the world's most free.

If Sweden has learned its lessons from big government politics, Americans should also be able to learn from the Swedes that high taxes and a bad school system will slow down any economic recovery. Americans must put a harder pressure on all politicians to limit the power and size of its government, if the Untied States of America should be able to survive.

Wednesday, January 25, 2012

Greece is Nearing Default and Portugal is Imploding

Europe is imploding right now and the US Federal Reserve can only watch and wait. Investors are already pricing in a Greek default, with 10-year bonds hitting a yield of 33%! And while it’s easy to dismiss Greece as the black sheep of the European Union family, there’s also new trouble brewing in Portugal.

The country simply can not any longer compete in a single-currency monetary union. According to the Bank of International Settlements, Portuguese debt is now 479% of their entire country’s GDP!

The Federal Reserve can’t paper over these problems. America’s day of financial reckoning getting closer. Instead of providing a solution, the Fed’s easy money approach — one that continually gets extended out further and further into the future — is a sign of how bad things really are in the Western world.

Sunday, January 22, 2012

The unsustainable expansion of the public sector

The current death spiral of the Western Wold economies has been caused by promises that no government will be able to deliver on a long term period. The Swedish professor in economy Erik Moberg predicted years ago that the expanding public sector could cause a serious threat to our democracy. The politicians competition for votes are inevitably driving our society to the abyss. The conclusion by Moberg is that favors to particular target groups may be quite profitable, and are more likely to be more profitable in the parliamentary, proportional setting than in other constitutional contexts such as the US presidential constitution with plurality.

Today the work of Moberg and the International Joseph A Schumpeter Society is more important than ever, since several countries apparently are running out of other peoples money that has paid for good welfare gifts to the voter base. Countries like Greece has already run out of funds and states like California are close to experience the same destiny.

Already in 1992 Moberg proved that Sweden, in spite of rapidly expanding total public expenses, the share of those expenses used for collective goods has, over a long period, and except for the time of the second world war, been fairly constant in-between 3–6%. The balance of public expenses has consequently increased continuously and has been used for individual goods or redistribution of wealth. Moberg suggests that public means are extensively used for buying votes. Sweden has a parliamentary constitution with proportional elections. In such a system parliamentary incentives for discipline are absent. Thats most likely the reason for that Sweden has progressed faster than US. But, although the public sector probably expands more slowly during normal times in the US presidential democracy than in a parliamentary democracy such as Sweden with proportionalism, it may nevertheless be more difficult to reverse the expansion in US.

Even if the expansion of the public sector is relatively slow due to the US presidential constitution with plurality, it is still important to design the constitution with provisions that automatically contain public sector growth. US Congressman Paul Ryan has suggested a cap on total government spending, that establishes a binding cap on total spending as a percentage of GDP at the levels projected to result from this legislation. In addition he has suggested to introduce a discretionary caps, enforced by sequestration, to freeze non-defense discretionary spending.

To ensure that the US economy over a long period of time could be strengthen the introduction of direct-democratic procedures like in Switzerland would reduce tax avoidance and lower the level of public debt. It has been well proven that Swiss municipalities requiring that budgets must be approved by a referendum have public expenditures 10% lower per capita than in municipalities where the political class is executing such rights. The the US ideology promoting excessive government levels of spending, deficits, and increasing debt stands in stark contrast to the the ideology with the Swiss municipalities allowing a finance referendum. The peoples referendum municipalities have 25% lower public debt than municipalities governed by the political class. This fact can not be dismissed and is extremely convincing for every individual believing in a limited government.

If no significant amendments will be made to the US constitution the nation will face an almost unavoidable expansion of the governments public sector and inevitably the republic will break down at a point when the big government (public sector) gets impossibly huge. Due to the political competition the US government public sector is always, and almost unavoidably, likely to expand. The basic cause is the majority rule, which makes it possible for the political class to exploit the minority. An introduction of a representative direct democracy with final checks and balances performed by the citizens combined with a cap on total government spending would prevent the present kind of exploitation to occur.

Societies has collapsed before and the most significant was the collapse of the Roman Empire. The breakdown was slow and painful. Some people moved to other regions and others stayed to excise their options. People who stayed turned from white to black markets, and from paying taxes to not doing so at all. When the empire lost its tax-collecting power the defense was week it was no match 476 AD for the barbarian German chieftain Odoacer to push aside the last Roman emperor, Romulus Augustulus, and to install himself as the new authority and liberator of a corrupt and decayed ideology.

Does Americans and Europeans have to repeat the same historical mistakes once again?

Why do the Swiss produce more wealth than Americans and Europeans?

Switzerland has demonstrated an incomparable economic strength to United States and the European Union. This little Alpine-country have shattered several myths created by misguided progressive (socialist inspired) economists and politicians. The dominating myths are that the Swiss political system does not matter in relation to the country’s extraordinary success and the assumption that manufacturing could be replaced with services, financial products and information-technology ideas. In interesting fact is that the Swiss federal republic’s constitution is in principle based on the United States Constitution, with double majorities required in its Federal Assembly (looking like the US two chamber Congress). The significant difference is laying in that Switzerland is a representative direct democracy with the final checks and balances by the citizens. By calling a federal referendum a group of citizens may challenge any law that has been passed by the Swiss Federal Assembly.
This system has prevented Switzerland from going on the same path as United States and the European Union. The Initiative & Referendum Institute Europe has proven how the widespread use of direct-democratic procedures in Switzerland actually strengthens the economy, reduces tax avoidance and lowers the level of public debt. A study by Zurich University economists Bruno Frey and Alois Stutzer showed that the influence of direct democracy on economic growth were striking. In cantons with stronger rights of participation on financial issues, economic performance is 15% higher and where citizens can vote on the budget, there is 30% less tax-avoidance. In municipalities where the budget must be approved by a referendum, public expenditures is 10% lower per capita than in places where residents have no such rights. It appears that citizens are more careful with the money taken from them as taxation than the politicians are. Municipalities which have the finance referendum have 25% lower public debt (5,800 Swiss francs per taxpayer) – the direct result of lower expenditure and greater tax income. Public services cost less in towns and cities with direct democracy. Professor Kirchgässner and his colleagues concludes: “In economic terms, everything is in favor of direct democracy – nothing against.”
While troubled industrial powers of the past like United States and United Kingdom have allowed their once strong manufacturing bases to become marginalized, Switzerland has supported a manufacturing renaissance that has led to a remarkable $63,000 (USD) GDP per capita. That is 50% higher than United States. Switzerland is achieving the top spot in the World Economic Forum global competitiveness index. The Swiss are applauded for their business sophistication and ability to innovate.
Although the Swiss franc has been strong against the euro and the dollar – raising the prices on Swiss export – manufacturing in Switzerland accounts today for more than 20% of Swiss GDP, well above most developed countries. Furthermore, the Swiss unemployment was only 3.3 percent in December 2011, the best number in Europe.
When China, Mexico and Eastern European countries, among others, offered an inexpensive manufacturing option for multinational enterprises the opinion that North America and Europe could succeed without a healthy production engine gained popularity. United States pursued economic policies that unwittingly ceded whole industries to these emerging countries. The progressive thinkers assumed that developed economies could replace manufacturing with services, financial products and information-technology ideas. The fact is that such services does not create more value than factories do. In decline of manufactured goods produced in United States and the European Union along with huge obligations for promised entitlement programs the political leaders are desperately trying to generate global economic activities to make up for cash-strapped consumers at home and looming deficits from stimulus programs promised to turn-around the recession.
Despite the fact that Switzerland is a high-cost country at the upper end of the product price pyramid it has not shared this destiny with the other western world countries. The Swiss have pursued a dual-pronged strategy: creating healthy conditions for a modern manufacturing base to flourish and stressing the importance of continuous innovation. The business friendly climate is nurturing industrial growth within the skilled sectors, such as, specialty chemicals, complex machinery, precision medical equipment and biotechnology. In those sectors knowledge and skills trump low labour costs stressing the importance of continuous innovation.
Five factors distinguish the industrial environment in Switzerland from other developed countries with declining fortunes in manufacturing: Openness – For a small country, Switzerland houses the headquarters of an outsized number of global multinationals. Liberal immigration rules have played a significant role. Targeted Training – The Swiss educational system tracks a minority of its young into academic paths in universities to study advanced disciplines but the majority of its students are directed into technical apprenticeships, often at manufacturing companies, to learn sophisticated operational skills and factory floor technologies in their teens. Workplace Flexibility – The ability of companies to increase or reduce employment and work days or hours relatively quickly creates an environment in Switzerland that lets companies be nimble in the face of changes in global manufacturing. As importantly, this flexibility has placed Switzerland below many of its European neighbours in total labour costs. Strong Clusters – Close proximity of manufacturers, suppliers and other stakeholders in industry clusters that cover virtually every critical manufacturing sector in Switzerland has made communications and interactions among product designers, developers and producers relatively easy, spurring product and process innovation in manufacturing. “Natural” Industry Restructuring – The Swiss have an aversion to let the government prop-up companies that are losing competitiveness, viewing this as costly in the short term and unsustainable over longer periods. This means that there is a more organic and gradual evolution and migration of value chain activities out of Switzerland, to companies and regions that can perform them better. The result is that the strongest companies survive and there are fewer large disruptions to the Swiss economy over time.
The main reasons for the Swiss success are based on a high level of competition in goods and labour markets combined with its unique political system that ensures contestability (a stabilized efficient system with checks and balances) providing the fundament for stability and prosperity of the country. The openness towards foreign markets and early internationalization of companies has led to a high degree of competition with positive effects on innovation, productivity and flexibility. The characteristics of the Swiss political system with direct democracy combined with a high degree of federalism or subsidiarity has lead to a political contestability that is preserving stability and decentralization.
The founding fathers of United States knew that local government and limited government were important in order to create laws that the people supports and believes in, and yet over the years the US government has become increasingly illegitimate. More and more political power in US is accumulated in the national government and representatives increasingly represent larger and larger population groups. Once the progressives changed the US system and the direction of the nation the nation has become increasingly unhappier. The laws Congress passes, both by Republicans and Democrats does not represent the majority as much as special interest groups. It is well known that the public sector has increased continuously and considerably in United States and other welfare countries. In several Western European countries the public sector is now well above 50% of GDP. The trend is clear, the USA is in a not to distant future reaching the same level. Due to political competition the public sector is always, and almost unavoidably, likely to expand in a republic like United States. An almost unavoidable expansion of the public sector seems to imply that the US democracy breaks down when the public sector gets impossibly large. Obviously the life of the US presidential democracy is limited to the time it takes for the public sector to grow to impossibly high levels. If United States and the European Union shall stand a possibility to survive it would be necessary to reduce the public sector according to research made by the International Joseph A Schumpeter Society.
Presently the US Constitution does simply not work like the founding fathers intended it to function. The system is inevitably leading to an impending break-down, and only a noteworthy repair can put the nation on the track it was intended to travel. Most certainly Switzerland's representative direct democracy system, adopted to the United States of America, could serve as that solution.