One aspect of the Republican tax plan would, incongruously, make the US more like a country known for high taxes and socialism: Sweden.
The Scandinavian country first introduced an inheritance tax in 1885, and by the 1970s it levied a 65% tax on inherited money, one of the highest rates in modern history. But in 2004, in a unanimous vote, Sweden’s parliament abolished its inheritance tax, which by then had fallen to 30%.
Now, as US Republicans push to pass a tax plan that would put an end to the US estate tax, currently levied at a top rate of 40%, they can cite this Scandinavian precedent as justification. So why did Sweden make the change?
The tax didn’t just tax the ultra-wealthy
In the US, the exemption on estate taxes is quite high—this year, when a person dies, all of her wealth exceeding $5.49 million is taxed. Republicans want to double the threshold at which the estate tax kicks in, before abolishing it entirely in a few years.
In Sweden, the exemption level wasn’t nearly as high. By 2004, the year the tax was abolished, Swedes whose estates were just a quarter of the average worker’s annual income were taxed. This isn’t really the case in the US, despite the rhetoric about overtaxed small-business owners and farmers: only 1 in every 700 deaths trigger estate taxes. (That’s roughly 0.001% of the US population.)
It turned into an evasion game
Economists Magnus Henrekson and Daniel Waldenstrom found that the effective estate tax rate—the share of taxes paid relative to the value of inheritances—for the ultra-rich wasn’t actually all that high (pdf). Swedish tax law offered many “safety valves,” or ways for Swedes to repurpose their wealth and pay less.
By 1990, the tax levied on personal wealth was more than double the rate applied to businesses. In response, families would redefine inherited wealth as business income, which the Swedish government taxed leniently, or hire family members and pay them steep salaries (a quick way to transfer wealth from one generation to the next). By 2004, the largest estates, valued at the equivalent of tens of millions of dollars, faced a similar tax rate as estates a tenth of the size.
The Republican tax plan would result in a similar divergence between personal and corporate tax rates, and probably encourage similar behavior among taxpayers facing a levy on their estates.
It didn’t generate much revenue
By 2004, the Swedish government concluded that closing loopholes in order to discourage the convoluted methods taxpayers were using to avoid estate taxes wasn’t worth it. The funds raised by estate taxes were never more than 1-2% of the Swedish state’s total tax revenue. Similarly, in the US estate taxes account for less than 1% of federal government revenue.
Still, some believe that even though inheritance taxes have a limited impact, they are symbolically important (pdf) for politicians looking to send a signal about wealth inequality. At the same time, right-of-center leaders in the US looking to get rid of the estate tax can bolster their case by pointing to Sweden, hardly an exemplar cited often by small-government conservatives.