David Cay Johnston: The Prospering Swedes

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David Cay Johnston's newest article at Tax Analysts describes his experiences on recent trips in Europe and Canada, chatting with ordinary people about their life situations.  Much of the article is focused on Sweden, where taxation is equal to roughly 50% of GDP.  (The corresponding figure for the US is about 28%.)   DCJ captures the texture of life in several European countries through his conversations with ordinary people -- working people whose counterparts in the US are engaged in a struggle to provide their families with the basics.

Ask a gaggle of bus drivers waiting for the tourists touring Old Town about housing, and every one of them turns out to own a summer home. How can bus drivers bear the burden of two mortgages? That’s a question that evokes polite smiles. These working-class Swedes explain that they own their homes outright.

Talk to waiters on break, to a schoolteacher smoking a cigarette on a bench in the late summer sun, to a teenage girl on a bicycle down at the water’s edge, and they all turn out to own their own boat, too — except for the girl, whose parents own one. In this country of 9 million people, there are as many as 1.3 million pleasure boats, meaning that on their own or through extended family, the vast majority of citizens have access to the water by motor or sail. That is a boat ownership rate at least twice that of the United States, data from the National Marine Manufacturers Association indicate.

How can this be? According to American political dogma, high taxes destroy economies. How can the Swedes afford second homes and boats, not to mention nice cars, after paying all those taxes?

Recently I read a study entitled "The World Distribution of Wealth" (several blog posts it inspired are still in draft form).  A table therein said that in Sweden, the top 10% hold 58.6% of the wealth; in the US, the top 10% get 69.8%.  That 11.3% difference is major.  Those homes, those second homes -- and a sense of wellbeing, of having a safety net ... 

DCJ continues,

A woman journalist in her early thirties told me a story that I endlessly repeat to friends. I told her I was surprised that so many Dutch and Flemish journalists at a conference in Groningen, a fishing town at the northern tip of the Netherlands, said they had no debt. A few of them, still too young to have gray hair, said they had enough savings to get by with freelance work for three, five, and in one case, seven years. ‘‘So do you have any debt?’’ I asked her. She looked around to make sure no one was in earshot. Her instinctive action reminded me of the old men I spoke to in Slovakia who looked around when I asked about their government’s competence. Two of them later admitted that decades after the Soviet collapse, they could not break the habit of looking around to make sure known informers were not listening in, seeking opportunities to endear themselves with Communist Party officials. ‘‘I borrowed money for a new car after mine was destroyed in an accident,’’ the woman told me, quickly explaining that this would be considered shameful by her peers. ‘‘I did not want to stop saving for our wedding,’’ she said.

I asked her about how big of a wedding she was planning, and she explained it was not the wedding itself she was saving for, but to have enough money to get married. ‘‘Ah,’’ I told her, ‘‘so you plan to get married once you have saved enough for the down payment.’’

‘‘No, no,’’ she interjected, ‘‘to buy a house. We are saving to own our own house. No mortgage. We almost have enough, with some help from our parents, to buy our own house. But when I had to get a new car, I thought maybe I should get a little bigger one for our family, and so I took out this loan, but only for 18 months.’’

Contrast that with America, where the average car loan has grown from 50 months a decade ago to about 60 months. Until recently the Internet was a bazaar of mortgages for 125 percent of the purchase price of a house or a monthly cash payment of 1.9 percent annual interest, sometimes with no credit check and no proof of income. The ensuing predictable mortgage disaster has now forced taxpayers to step in to force the sale of one big investment bank, Bear Stearns, on terms that let its chair walk away last spring with more than $60 million, and, in recent days, has led taxpayers to take over two mortgage giants, Fannie Mae and Freddie Mac, at a cost that may run into the hundreds of billions of dollars.

Even without these policy disasters, mortgages fueled American housing thanks to a big dollop of tax benefits. Yet for every dollar of additional home equity that Americans built up from 1980 to 2006, they took on $2 of mortgage debt, Federal Reserve data show. Back in 1980, Americans owned two-thirds of the value of their homes and owed the other third to banks. By 2006 they owned just half. Today, with the collapse of the housing market, equity is surely less than 50 percent of the value of all homes.

That brings me back to the Swedish bus drivers—and waiters and clerks and petty merchants — who own second homes in the countryside, some of them on the water. Of the people I spoke to, all said they owned their property free and clear.

... that lack of debt ... (If you're curious about the effect of debt on the distribution of net worth, you might look at the tables at  http://www.wealthandwant.com/issues/wealth/50-40-5-4-1.htm - see Line 21 in each table, and compare it to Lines 1 and 2.)

They do not owe their souls to the company store. They do not stagger under 30-year mortgages for the maximum they are permitted to borrow, to live as close as they can afford to their work.

In Bermuda, an island country which depends on tourism (and taxes on the tourists) and offshore banking, and has no income tax, people tend not to have mortgages for very long, despite the tight housing supply.  They take on 2 jobs each for a few years, pay off whatever they borrowed, and live mortgage-free. (At least that's the picture I got from someone I was interviewing in the same way DCJ described.)

I welcome the connections DCJ is making here ... the increasing dominance of the FIRE sector (finance, insurance and real estate), the wildly ridiculous compensation provided to even failing CEOs, the privatization of gain and the socialization of risk.

What SHOULD we privatize?  And conversely, what SHOULD we socialize?  Should we just tax everything a little bit, on the basis that "balance" is a fine thing, or are there some taxes which are superior to others, in terms of their justice, their efficiency, their administrability, etc.?

The question of what ought to be privatized and what ought to be socialized was addressed well by Bob Andelson, in his essay, Henry George and the Reconstruction of Capitalism, which I commend to your attention.  When we permit the privatization of that which should be socialized, we give privileges to the privatizers, at the expense of everyone else.  When we socialize that which is rightly private property, we steal from those who produce, and we destroy incentives to produce.  Both kinds of errors create problems and both can be avoided!

Much depends on what we tax.

As Henry George (1839-1897), the author of a (currently) much-neglected book on political economy, Progress & Poverty, put it:

"It is obvious that all taxes come from the product of land and labor. There is no source of wealth other than the union of human exertion with the materials and forces of nature. But equal taxes may have very different effects on production, depending on how they are imposed.

Taxes that reduce the rewards of producers lessen the incentive to produce. Taxes based on the use of any of the three factors of production -- land, labor, or capital -- inevitably discourage production. Such taxes introduce artificial obstacles to the creation of wealth.

The method of taxation is, in fact, just as important as the amount. A small burden poorly placed may hinder a horse that could easily carry a much larger load properly adjusted. Similarly, taxes may impoverish people and destroy their power to produce wealth. Yet the same amount of taxes, if levied another way, could be borne with ease. A tax on date trees caused Egyptian farmers to cut down their trees; but twice the tax, imposed on land, had no such result.

Now, taxes on labor as it is exerted, on wealth as it is used as capital, or on land as it is developed will clearly discourage production -- much more than taxes levied on laborers whether they work or play, on wealth whether used productively or fruitlessly, or on land whether cultivated or left idle."

[That's from a recent abridgment of P&P, available online at http://www.henrygeorge.org/pcontents.htm)

What we tax matters greatly.  When we tax that which we shouldn't tax, we get negative effects.  And equally important and more ignored, when we fail to tax that which ought to be taxed -- what the classical economists called "LAND" -- we get very undesirable effects.  We ignore their wisdom at our peril.

See http://www.wealthandwant.com/ and http://www.answersanswers.com/ for more on the wisdom of the classical economists with regard to taxation, justice, efficiency and widespread prosperity.  How we get there may not be the same as what has worked so well in Sweden.  But we ought to familiarize ourselves with the options, and the logic.  HG's ideas are an important part of that.

Talk to waiters on break, to a schoolteacher smoking a cigarette on a bench in the late summer sun, to a teenage girl on a bicycle down at the water’s edge, and they all turn out to own their own boat, too — except for the girl, whose parents own one. In this country of 9 million people, there are as many as 1.3 million pleasure boats, meaning that on their own or through extended family, the vast majority of citizens have access to the water by motor or sail. That is a boat ownership rate at least twice that of the United States, data from the National Marine Manufacturers Association indicate.

How can this be? According to American political dogma, high taxes destroy economies. How can the Swedes afford second homes and boats, not to mention nice cars, after paying all those taxes?