Lifetime versus Annual Tax‐and‐Transfer Progressivity: Sweden, 1968–2009

Date01 October 2016
AuthorBertil Holmlund,Daniel Waldenström,Niklas Bengtsson
DOIhttp://doi.org/10.1111/sjoe.12160
Published date01 October 2016
Scand. J. of Economics 118(4), 619–645, 2016
DOI: 10.1111/sjoe.12160
Lifetime versus Annual Tax-and-Transfer
Progressivity: Sweden, 1968–2009
Niklas Bengtsson
Uppsala University, SE-75120 Uppsala, Sweden
niklas.bengtsson@nek.uu.se
Bertil Holmlund
Uppsala University, SE-75120 Uppsala, Sweden
bertil.holmlund@nek.uu.se
Daniel Waldenstr ¨
om
Uppsala University, SE-75120 Uppsala, Sweden
daniel.waldenstrom@nek.uu.se
Abstract
In this paper, we analyze the evolution of tax-and-transfer prog ressivity in Sweden over both
annual and lifetime horizons. Using a rich micro panel covering the period 1968–2009, we
calculate tax rates over a cohort’s entire working life cycle. Our main finding is that taxes
are considerably less progressive over the lifetime than in any single year. Social insurance
transfers to transitory low-income earners account for most of this result. We offer a number
of robustness checks of the measurement of lifetime incomes and progressivity, but none of
them changes our overall findings.
Keywords: Income distribution; lifetime income; redistributive effect; tax progressivity;
transfers
JEL classification:D31; H20
I. Introduction
A fundamental problem with conventional assessments of tax burdens is
that they typically rely on annual cross-sectional outcomes. Incomes vary
over the life cycle, with young people often being low-income ear ners,
regardless of whether they will be high-paid surgeons or low-paid clerks in
We have received valuable comments from Giacomo Corneo, Stephen Jenkins, Andreas
Peichl, Thomas Piketty, Alain Trannoy, three anonymous referees, and participants at the
National Conference in Economics in Sweden, Lund 2010, the 10th Journ´
ees Louis-Andr´
e
G´
erard-Varet Conference in Public Economics, seminars at IZA, IFS, Helsinki Center of
Economic Research, Copenhagen University, Research Institute of Industrial Economics and
Gothenburg University. We acknowledge financial support from the Jan Wallander and Tom
Hedelius Foundation, Riksbankens Jubileumsfond, and the Swedish Council for Working Life
and Social Research.
CThe editors of The Scandinavian Journal of Economics 2015.
620 Lifetime vs annual tax-and-transfer progressivity: Sweden, 1968–2009
the future. Capital gains are typically observable and taxed when they are
realized rather than when they accrue, and such one-shot realizations might
not accurately depict the lifetime income status or lifetime tax burden.
Accounting for lifetime variations in both income and the ability to pay
taxes should thus be important for conducting a balanced assessment of
the progressivity of the tax system.
In this paper, we analyze the implications of studying the progressivity
of taxes and transfers from an annual versus a lifetime perspective. We do
so by exploiting a rich Swedish data source with register information on
the taxes paid and benefits received by a large and nationally representative
sample of individuals. Using a panel covering a 42-year period, we are able
to compute measures of lifetime progressivity, relating information about
actual lifetime tax payments and actual lifetime incomes for various parts of
the distribution of lifetime incomes. The use of such a long panel appears to
be a unique contribution to the literature. Previous studies of the redistribu-
tive impact of taxes over one’s lifetime have typically been based on either
simulation methods or considerably shorter panels. There are indeed advan-
tages to using micro-simulated life spans; in particular, they offer a more
controlled approach to incorporate theoretically relevant aspects of lifetime
tax incidence. Our work extends this previous work on tax progressivity,
which began with Pechman and Okner (1974) and features subsequent con-
tributions by Davies et al. (1984), Slemrod (1992), Fullerton and Rogers
(1993), Cameron and Creedy (1994), Creedy and van de Ven (2001), and,
using Swedish data, Bj¨
orklund et al. (1995).1The richness and size of our
data – a sample size of approximately 200,000 individuals per year – allow
us to compare narrow income segments at the top of the income distribu-
tion, such as percentiles and tenths of percentiles. This focus is particularly
relevant for specifying the differing impacts of labor and capital taxation.
Another contribution of our paper is that it provides a comprehensive
assessment of how the redistributive properties of the Swedish tax system
have evolved in recent decades. The Swedish tax system has undergone ma-
jor changes over the past 40 years. The overall tax burden has increased,
and government tax revenues have g radually become more dependent on
social fees levied on employers (payroll taxes) and value-added taxes. Spe-
cific reforms and other legal changes are particularly noteworthy. In 1971,
the traditional system with joint taxation of married couples was replaced
by a system in which each spouse pays taxes on his or her own income.
The tax reform of 1991 involved substantial cuts in marginal income taxes
1There is a related and more extensive body of literature analyzing income inequality
over annual and lifetime horizons, which devotes little or no attention to taxation and
tax progressivity; see Creedy (1999) for an overview. Studies of Sweden include Blomquist
(1981), Lindbeck (1983), Bj¨
orklund (1993), Hussenius and Sel´
en (1994), Bj¨
orklund and
Palme (2002), and Pettersson and Pettersson (2003).
CThe editors of The Scandinavian Journal of Economics 2015.

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