How Harmful is the Swedish Tax System to Economic Growth?

Abstract

The Swedish tax system of 1991 and its effects on growth and welfare are examined within three commonly used growth models. The results tend to be very sensitive to the choice of model. Compared with a benchmark of first-best taxation, a model with an endogenous labor-leisure choice suggests that current taxes are three times as harmful as suggested in a model with fixed labor supply. In addition, different taxes have very different marginal impacts within different models, which is clear from the marginal analysis in the paper. The adverse effects of the tax system further depend on open or closed economy assumptions and the assumed principle of capital taxation in the open economy. These differences are also sensitive to the model structure.

JEL Classification: D19, E62, H21, O41, O52