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Issues relating to taxes and benefits.

This section treats central structural questions relating to the functioning of the tax and benefit systems, as well as current issues in the area of taxes.

New Tax Rules

The Budget Bill for 2006 contains new tax provisions that will affect the revenue of the general government sector in 2006 and 2007. The tax reduction for the individual pension contribution will be raised from 87.5 to 100 percent in 2006, lowering household income taxes by about SEK 6.5 billion.

In the area of capital, property and business taxation, the so-called limitation rule for the real-estate tax will changed. Under the new rule, households will not be required to pay more than 4 percent of household income in real-estate tax on a permanent home. In addition, there will be a change in the so-called 3:12 rules for taxation of owners of closely held firms.

Among selective taxes, the tax on advertising will be lowered, whereas taxes on cigarettes and twist tobacco and on certain alcoholic beverages will be raised. As part of an ongoing "green" tax shift, (39) other selective taxes will be changed as well. Taxes on vehicles, electric-power and waste will be in focus, as will a tax on air travel. The tax reduction will be provided through an increase in the general basic deduction of SEK 1 500-1 600 for taxpayers with taxable earned income between SEK 46 900 and 297 100. There will also be some increase in the basic deduction for the income brackets of SEK 39 400-46 800 and 297 200-312 100. Furthermore, employer contributions and payroll taxes will be lowered for sole proprietorships that hire employees. In addition, employer contributions and individual social security contributions will be changed through a reduction of 0.18 percentage point in the general payroll contribution.

The total scope of the green tax shift in the period 2001-2010 is SEK 30 billion. The tax shift implemented so far totals almost SEK 14 billion, and in 2006 environment-related tax increases and work-related tax reductions will total SEK 3.6 billion.

Economic Incentives to Work

To follow how economic incentives to work develop over time, and how the proposed changes in rules would affect them, the NIER publishes on a on-going basis the net compensation rate for an additional input of work. The net compensation rate is defined as the net share of an increase in labour costs received by the person providing an additional input of work, after increases in taxes and charges and decreases in benefits. (40) One advantage of the method is that effects on employer contributions, increases in benefits and indirect taxes are also considered. (41)

The mean net compensation rate for all working Swedes is 40.4 percent in 2005. The net compensation rate in 2006 will be affected by the new tax and benefit provisions in the Budget Bill for that year, which in total increase the average net compensation rate by 0.07 percentage point (see Table 36).

The increase in compensation for the individual pension contribution will raise the net compensation rate, whereas the limited indexation of tax brackets and the green tax shift (with a higher basic deduction and higher selective taxes) will reduce the net compensation rate. The higher income ceiling in the health insurance system increases the net compensation rate, as an addition input of work thereby provides a higher sickness benefit for incomes between the old ceiling and the new one.

(39) The "green" tax shift involves raising energy and environment-related taxes in exchange for tax cuts for individuals and firms.

(40) The mirror image of the net compensation rate is the marginal effective tax rate, which is thus defined as 100 percent minus the net compensation rate.

(41) The NIER's method of calculating the net compensation rate was explained in the box captioned "NIER Spotlights Incentives to Work," in The Swedish Economy, August 2004.
Table 36 Net Compensation Rate, 2006


 value Change

Old rules 40.26
New rules 40.33 0.07
of which:
Compensation for individual pension contribution 0.21
Limited indexation of tax brackets -0.01
Increase in basic deduction -0.10
Higher income ceiling in the health insurance system 0.03
Tax shift. etc. -0.06

Source: NIER.
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Publication:The Swedish Economy
Date:Dec 1, 2005
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