The Laffer Curve Isn’t Completely Stupid


I did my taxes today! Last year was one of those rare years where I had income, and I nearly forgot.

Americans don’t like to pay taxes. We’re unique in this regard. Swedes love paying taxes. Danes love to pay taxes. The Dutch love taxes. Even the French love taxes!

If government-controlled media outlets say so, then it must be true. But just to be sure, I consulted a Scandinavian friend.

    E: Why do Swedish people love taxes so much? Is it because your commitment to equality transcends the desire for money? Or do you just prefer to have the government do your thinking for you?

    Swede: What? Nobody likes to pay taxes anywhere. Sweden just does a good job of maximizing tax rates where it can.

Sweden has the highest income tax rate of all the OECD countries. Even if Swedish wage-earners don’t like it, what are they going to do? Flee to another country and claim refugee status? As evidenced by Sweden’s tax revenue, the citizens prefer to stay.

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Sales tax follows a similar strategy. The Nordic countries all have a 25% sales tax. High sales tax is rather regressive, but what are the residents going to do, take their business elsewhere? The government can tax as much as it wants as long as there’s no alternative to buying stuff.

Corporate taxes are a different story. It’s really easy to move a corporation to another country. Placing company headquarters in Liechtenstein is the European version of establishing a Delaware C-Corp.

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Money flows to where it’s treated best, so Sweden keeps its corporate tax rates relatively low. IKEA, icon of Swedish capitalism, is actually owned by a tax-exempt holding company based in the Netherlands. The holding company is then owned by a charitable foundation in Liechtenstein, dedicated to “innovation in the field of architectural and interior design” and controlled by the founder of IKEA.

IKEA’s tax-free accounting structure was set up in the 80s, when Sweden’s corporate tax rates were much higher. Today, the US has the highest corporate tax rate of any developed country, and maybe that has something to do with why Burger King moved its headquarters to Canada.

Warren Buffett likes to point out that he has a lower tax rate than his secretary. Of course he does! Buffett’s secretary is an American employee, and there’s not a whole lot she can do to change that fact. Buffett himself, on the other hand, is an untethered capitalist. If his capital-gains tax is too high, he’ll simply take his capital elsewhere: Just like how he invested $3 billion to take Burger King to Canada.

Warren Buffett Burger King

See Also:
1. E. Norrman. Tax Policy in Sweden. NBER, 1997.
2. Dutch masters of tax avoidance –the guardian
3. Wrappers come off Ikea structure –FT

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