U.S. Congresswoman and Bronx-native Alexandria Ocasio-Cortez would find herself at home in Stockholm.
The newly minted lawmaker is proposing to lift the top marginal tax rate to 70 percent on incomes starting at $10 million. The idea has drawn both praise and jeers from across the political spectrum.
For a real world example, critics and fans alike should look to Sweden. The Nordic country has a marginal tax wedge -- the difference between the cost to the employer and what a worker takes home -- of 69.7 percent on salaries above $79,000. That’s almost 30 percentage points higher than in the U.S., and it kicks in a lot earlier than Ocasio-Cortez is proposing.
Critics of high taxes claim the policy stifles economic growth by reducing the incentive for people to work. But Sweden’s employment rate is 77.5 percent, beating the U.S.’s 71 percent. The Nordic country has also surpassed the U.S. in terms of economic growth this decade, expanding 2.7 percent a year, on average, compared with 2.2 percent for the U.S.
Ocasio-Cortez, 29, is a former campaign worker for Senator Bernie Sanders who has held up the virtues of the Nordic economic model. She wants to raise taxes to pay for programs to fight inequality and climate change and provide health care for all, benefits already enjoyed by Swedes and many Europeans. As a result, income equality is notably higher in the region than in the U.S.
Inequality, and its impact on growth, has become one of the key issues explored by economists in the post-financial crisis world. A recent paper by economists Peter Diamond and Emmanuel Saez calculated that the optimal top tax rate would be about 73 percent.
High taxes have gained acceptance in Sweden and across the Nordic region, where citizens enjoy state-funded access to services such as child care and education. Losing out on those benefits, even if take-home pay grows, is considered too great a risk.
“Taxes are never collected just for the purpose of collecting more taxes,” said Olli Karkkainen, an economist at Nordea Bank Abp. “What matters is what the taxes are used on.”
In the Nordic countries, the negative effects of high taxes are compensated for by the services that tax money buys -- for instance promoting employment by supporting child care, he said.
The difference between taxes in Sweden and the U.S. becomes less stark when one looks at low-income workers. Sweden’s marginal tax wedge for that group is only 45.6, compared with 34.3 percent in the U.S. It’s 48 percent for Swedish couples with children.
To be sure, even Sweden has its limits when it comes to taxes. While the Social Democratic-led government has raised levies over the past four years, that came after almost a decade of tax cuts from the previous center-right government. According to the OECD, Sweden’s tax wedge fell by 7.2 points from 2000 to 2017, a decline surpassed only by Hungary and Israel.
Economists say high taxes work in the Nordic region because the notion of state welfare is so deeply rooted in its culture. The region also has a highly educated population, multiple supports built into the labor market and a relatively high level of trust in government, which allows the system to work.
“No country can start with a clean slate,” said Karkkainen. “So taking the Nordic model and attempting to implement it in the U.S., which has a much larger population and very different history, it wouldn’t work there in the same way as it works here.’’
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