NCPA - National Center for Policy Analysis

Fiscal Illusion and Fiscal Obfuscation: Tax Perception in Sweden

October 17, 2011

Fiscal illusion is a term that is applied when the public largely misunderstands key tax and spending parameters, which distort their financial and governmental beliefs.  Looking specifically to Sweden, Bjorn Wallace and Tino Sanandaji, Ph.D. students at the Stockholm School of Economics and the University of Chicago, respectively, examine fiscal illusion in that country.

Sweden is an ideal country in which to conduct such a study because its government collects a greater share of national income in taxes than in any other country.  Therefore, it seems logical that the Swedish government would be highly incentivized to encourage illusion, as this would help to muddle the actual amount of personal income that is paid to the government.

  • When questioned about the portion of the average Swede's personal income that is paid in taxes, the average response was 40 percent and the median 35 percent -- far off from the correct rate of 63 percent.
  • Though most respondents correctly identified the amount of the employer portion of the payroll tax, most misunderstood the burden of the tax, with only 24 percent stating correctly that it was on employees while 56 percent stated it was on employers.
  • In 2003, taxes comprised 55 percent of Sweden's national income.

The strong concentration (roughly half the respondents) of responses pointing to a tax burden of around 30 to 39 percent suggests that many respondents were thinking only of the direct income taxes.  This suggests that respondents failed to understand the true level of taxes because of the number of revenue sources and the fact that some are partially hidden.

One of the hidden sources of revenue is the employer portion of the payroll tax.  While most respondents knew the level of the tax, they failed to realize that empirically, the tax is paid by employees; though the company technically pays the bill, the employee receives less compensation and fewer people are able to work.

Source: Bjorn Wallace and Tino Sanandaji, "Fiscal Illusion and Fiscal Obfuscation: Tax Perception in Sweden," Independent Review, Fall 2011.

For text:

http://www.independent.org/pdf/tir/tir_16_02_5_sanandaji.pdf

 

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