Is wealth tax the best way to fight inequality?

Wealthy Swedes were among the first to warn that the pandemic would bring crippling social and economic costs. When Covid-19 struck, industrialist Jacob Wallenberg staunchly opposed draconian lockdowns, fearing devastating unemployment and social unrest.

That chimed with the Swedish government's relatively hands-off approach to social distancing. The economy and civil liberties were protected, though ultimately at the cost of a higher death toll than neighbouring countries, drawing anger from voters and the royal family. The country's image of being a "moral superpower" was broken.

Today the economy is racing back to pre-pandemic levels, but a new socioeconomic challenge is brewing: inequality. Rich Swedes are now richer, with financial markets juiced by central-bank liquidity and a vaccine-led rebound. Five of the country's top billionaires added a combined $18 billion to their total wealth over the past year, according to data compiled by Bloomberg. A property boom is helping mint new millionaires, with prime Stockholm real-estate prices up 7.7 per cent year-on-year, according to Knight Frank. (That's better than San Francisco and London.) A rich seam of tech talent and soaring valuations for startups like Klarna Bank AB are& stoking excitement among bankers.

At the same time, Sweden's services sector has shed jobs and its immigrant population has struggled to find work. Inequality as measured by household disposable income is higher than it was in the 1980s, according to the central bank.

The stark contrast is leading to a now-familiar refrain: a possible wealth tax. Finance Minister Magdalena Andersson, keenly aware of the damage to Sweden's brand as a strongly egalitarian market with a cradle-to-grave welfare state, is dangling the idea of a levy on millionaires. Sweden has historically been a more equal place than most of the rich world, but there's new anxiety after Covid. It's rare to see such a widening gap between those who own property and shares and those who don't, according to Bloomberg Intelligence analyst Johanna Jeansson.

In this case however, a broad wealth tax just isn't the best way to address burgeoning inequality, no matter how politically attractive the theory. For Swedes, the disappointing reality of wealth taxes is still within living memory.

The country scrapped a long-running wealth tax in the mid-2000s (along with a host of other levies on capital) that encouraged capital flight and discouraged investment. At its peak, aggregate revenue from the measures never topped 0.4 per cent of gross domestic product in the postwar period, according to a 2014 Nordic Tax Journal paper. On the eve of its abolition, it accounted for a measly 0.16 per cent. This disappointment, mirrored elsewhere, is why such taxes on the wealthy are more debated than deployed.

A one-off Covid solidarity tax as seen in Argentina might seem more effective - some $2.4 billion has been collected by levying as much as 5.25 per cent of assets' value from the Latin American country's richest people. But such a measure would need a very deft political touch to convince citizens the move is a one-off, and to keep investor confidence intact amid the pandemic. It would also fail to fundamentally address Sweden's longer-term inequality challenge: Knight Frank forecasts that by 2025 the number of Swedes with more than $30 million of net wealth will rise by 59 per cent.

Sweden's government should instead take a more surgical approach and target a root cause of the wealth gap, namely inflated asset prices. Property, for example, enjoys low taxes that are capped. That incentivizes investors to keep on buying and prices out those that don't or can't. The OECD's recent recommendations rightly advocate a shift away from generous mortgage tax treatment and low taxation on real estate. The country's lack of an inheritance tax deserves a rethink. Without one, accumulated asset wealth will be easily passed on to Sweden's many family scions just as the pandemic has thrown up more obstacles to less fortunate young people such as educational inequality.

In a country where the ranks of the asset rich are growing, even these moves would take political courage. Somewhat dispiritingly, Andersson seems to have ruled out the idea of including property in a future levy on wealth. Aspiring Wallenbergs may face a reckoning one day, but not yet. (Bloomberg)