How Can Scandinavians Tax So Much?

• Published in: The Journal of economic perspectives 2014-10, Vol.28 (4), p.77-98
• Main Author: Kleven, Henrik Jacobsen
• Format: Article
• Language: English
• Subjects: Child care; Consumption; Economic development; Economic growth; Economic models; Economic statistics; Economic theory; Enforcement; Estimated taxes; Evidence; Fiscal policy; GDP; Gross Domestic Product; Income redistribution; Income taxes; Information; Labor supply; Labour force; Marginal tax rate; Optimal taxation; Property taxes; Scandinavia; Self employment; Self report; Studies; Symposia: Tax Enforcement and Compliance; Tax audits; Tax evasion; Tax rates; Tax reform; Tax revenue; Tax revenues; Taxable income; Taxation economics; Third party; U.S.A; Use taxes
• ISSN: 0895-3309; 1944-7965
• DOI: 10.1257/jep.28.4.77

American visitors to Scandinavian countries are often puzzled by what they observe: despite large income redistribution through distortionary taxes and transfers, these are very high-income countries. They rank among the highest in the world in terms of income per capita, as well as most other economic and social outcomes. The economic and social success of Scandinavia poses important questions for economics and for those arguing against large redistribution based on its supposedly detrimental effect on economic growth and welfare. How can Scandinavian countries raise large amounts of tax revenue for redistribution and social insurance while maintaining some of the strongest economic outcomes in the world? Combining micro and macro evidence, this paper identifies three policies that can help explain this apparent anomaly: the coverage of third-party information reporting (ensuring a low level of tax evasion), the broadness of tax bases (ensuring a low level of tax avoidance), and the strong subsidization of goods that are complementary to working (ensuring a high level of labor force participation). The paper also presents descriptive evidence on a variety of social and cultural indicators that may help in explaining the economic and social success of Scandinavia.