You mean the hordes of immigrants that Trump keeps casually talking about?
Not really. We’re not in the realm of presidentially endorsed ‘fake news’. In a completely different space, Sweden genuinely has a quirky problem of plenty – one that a lot of countries, including India, would be happy to have.
And what might that be?
Taxpayers in Sweden are paying government taxes that are way in excess of their dues, to the point where the government feels financially burdened, and is devising ways to get its citizenry to pay less by way of taxes, particularly those that are not due. This is quite unlike the situation in India where taxpayers try to minimise — or, worse, dodge — their tax payments, and governments come after them with a big stick.
But doesn’t Sweden already have among the world’s highest tax rates?
It does, too. The peak income tax rate is 57 per cent!
What topsy-turvy world is this where citizens voluntarily pay more tax than they need to – and the government urges them to cease and desist?
Swedes aren’t exactly motivated by altruism when they’re stuffing the government’s coffers with their hard-earned money. Nor does a situation where the government rakes in taxes hand over fist make for optimal management of finances and the macroeconomy. All these are the unintended consequences of abnormal policy prescriptions, and the decidedly human (and rational) response of citizens to such policies.
I still don’t get it.
You will in a bit. The first thing to understand is that unlike fast-growing economies like India (which are constantly battling inflation, and therefore interest rates are pegged high), many developed European economies are staring at years of deflation, a situation in which prices tend to fall owing to inadequate growth traction. That sets off a downward spiral, since consumers typically postpone purchase decisions in anticipation of a further fall in prices.
And so?
And so, central banks, including in Sweden and elsewhere, have since March 2015 resorted to negative interest rates in order to defeat deflation. What this means is that bank deposits earn ‘negative interest’: effectively, you pay the bank to deposit money in your account. It is one unorthodox way of getting consumers to spend now, rather than “save”. And, remember, the Swedes have transitioned to a near-cashless economy, and can’t hoard cash.
But then why do people pay more taxes?
They were merely exploiting a loophole in the tax law provision under which the government would pay a positive interest rate of 0.56 per cent on any amount that was overpaid in taxes, which would be returned to the taxpayer. Effectively, citizens were using their tax account like a bank account – and earning an interest on them, which they weren’t getting elsewhere.
And the government lets them?
Realising what was happening, the government plugged the loophole, lowering the interest payable on excess tax credits to zero, but that’s still better than a bank account with negative rates. So, Swedes continue to pay excess taxes.
It doesn’t sound as nutty as it initially did.
It doesn’t at all. It just goes to show that macroeconomic management isn’t a precise science, and human behavioral idiosyncrasies can disorient even well-intentioned policies. It’s also a function of the fact that when a government offers a cradle-to-grave welfare ecosystem, in the way that Sweden does, enlightened citizens actually pay high taxes wilfully. But that’s a story for another day…
(The article first appeared in The Hindu BusinessLine.)