How taxes shaped Sweden’s entrepreneurs

Sweden’s entrepreneurial history is closely linked to how labor and capital are taxed. In his doctoral thesis, Niklas Wykman, currently Minister for Financial Markets, shows how taxes and tax rules have affected entrepreneurship in different ways for more than a century.

The design of the tax system has had an impact on when Swedish entrepreneurship has flourished and when it has slowed down. This is shown by Niklas Wykman, who recently presented his thesis at Örebro University.

– It took 13 years, he says when we meet at the Ministry of Finance, adding that he has also been doing other things in the meantime.

The research, most of which was done before he became a minister, has focused on the taxation of entrepreneurs in Sweden over time. By doing something no one else has done before, he has created a time series between 1862 and 2018 that includes different taxes and tax levels.

– In general, there has sometimes been the idea by some economists and politicians that taxes don’t matter that much. But they do. That’s what my review shows, and in my thesis I also give a better insight into what the tax system looks like.

– Several economic researchers have previously pointed out that the conditions for entrepreneurship have varied over different periods of time. What I have done in my research is to use mathematical and statistical methods to show that historically there have been different tax regimes that have affected Swedish entrepreneurship.

A golden age of entrepreneurship

In the time series created for the period 1862 to 2018, five different tax regimes have been identified. The first is up to the middle of the First World War, the second up to the end of the Second World War, the third up to the mid-1960s, the fourth up to around 1990 when the fifth starts.

The first tax regime stands out with its favorable conditions for entrepreneurial initiatives and during this period many of Sweden’s current large companies are founded.

– We often think of Sweden as a high-tax country. But under the first tax regime, the tax burden was low. Compared to many other countries, we also had secure, stable and reliable property rights and a functioning rule of law.

This golden age of entrepreneurship is followed by a period in which the conditions for entrepreneurship gradually deteriorate. During tax regimes two to four – the end of the First World War to the early 1990s – taxes were gradually raised and the tax burden increased. This had a negative impact on entrepreneurial initiatives. The tax system during this period is more favorable to older and already established companies.

The tax reform that turned the tide

What marks the beginning of the fifth tax regime is the tax reform implemented in the early 1990s. It introduced so-called dual taxation, whereby labor and capital are taxed differently, while introducing rules to maintain uniformity and neutrality in the tax system.

– The tax reform of the early 1990s laid the foundation for a new entrepreneurial renaissance in Sweden. It was clear that the tax system after the reform became more favorable to entrepreneurship. “We are getting back what we had under tax regime one after a number of decades of excursion into a more unfavorable tax climate for entrepreneurs,” says Niklas Wykman.

The fifth tax regime works better for entrepreneurs although there is unpredictability as the rules have changed a number of times since the early 1990s – although the tax rules for privately owned companies have stabilized in the last decade.

Addressing through tax law the question of how much financial compensation should be provided for a risk and uncertainty taken on by an entrepreneur is not an easy issue according to him.

– Entrepreneurial income does not exist in the tax legislation. There is labor and capital, period.

Difficult to capture the entrepreneur in models

He hopes that the models and time series he has developed in his thesis can be used to better predict how future tax changes will affect entrepreneurship.

– Entrepreneurs are difficult for us economists to handle in our mathematical models. Their role is to break up the old and that’s how it works with the equilibrium models of economics.

– Here I hope that what I have done by developing these flexible models of the effects of the tax system can be used to assess in advance how changes may affect entrepreneurship.

Given his role as minister, Niklas Wykman is cautious about making policy recommendations in his conclusions. But he does emphasize one thing.

– Creating favorable conditions for investment and entrepreneurship, reconciling it with progressive taxation on labor income, and achieving uniformity and neutrality as a legislator – this is notoriously difficult and perhaps even impossible to do.

More about the thesis
Niklas Wykman recently defended his thesis “Essays on Taxation and Entrepreneurship” in economics at Örebro University.

Footnote: In the thesis, an entrepreneur is defined as an active owner in a closely held company