Sweden’s Interest Rates and Budget Surplus

Sweden has a very unique problem. Businesses and households overpaid their taxes by about $4.40bn in 2016. This sum is about half of the country’s total budget surplus last year. The Economist asks what the cause of this phenomena is. From a sociological perspective, we might look at Sweden’s Lutheran heritage, notable for how they value community and family ties. Perhaps some variable exists that can explain one’s ‘collective interest,’ that is, the value we place on the overall success of your community or country. George Akerlof and Rachel Kranton attempted to quantify individual identity’s effect on decision making. Perhaps their model might be instructive for Swedish taxpayers.

There appears to be a better, economic explanation for this behavior. For the last two years, interest rates in Sweden have been negative. However, taxes overpaid to the government earn 0.56% until rebates are processed. With a tax surplus of billions of krona, it takes time for taxes to be rebated to payers. The country’s national bank and budget office have established a system where the national budget has become a savings account for taxpayers. Unfortunately the country’s tax administration is overburdened by tax rebate requests.

For a country with tax rates as high as 57% for the highest incomes, the idea that people and businesses are voluntarily paying higher taxes sounds hard to believe. Though we do not know what this structure will spell for the country’s future, some concerns about the additional cost to the government from interest payments to taxpayers have been voiced. Worries about the richest population taking advantage of the system, putting what income they have left after 57% has gone to the state, have been addressed. So far, in a county with relatively little inequality this hypothesis has yet to yield any evidence. All that being said, a consistent budget surplus in a country with a large welfare-state is impressive to say the least.

The country has, whether intentionally or not, constructed a scenario in which in a time of financial crisis the national budget might be able to fill a void with excess tax held by the government. This makes average tax payers synthetic creditors to their government and overpaid taxes almost like short-term bonds. Maybe this is where that, unquantifiable ‘collective interest’ variable is more useful. Swedes clearly place a significant amount of trust in their government. A country of people already willing to shell out half of their income to support universal healthcare, free higher education and generous maternal, unemployment and disability benefits for their fellow countrymen, is probably equally as willing to trust in their leadership to manage those funds prudently.

Too Many Taxes!