Scandinavian Working Papers in Economics

Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics

No 2011:2: Tax Policy and Employment: How Does the Swedish System Fare?

Jukka Pirttälä () and Håkan Selin
Additional contact information
Jukka Pirttälä: University of Tampere and the Labour Institute for Economic Research, Postal: Department of Economics and Accounting, FI-33014 University of Tampere, Finland
Håkan Selin: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper reviews the literature on optimal taxation of labour income and the empirical work on labour supply and the elasticity of taxable income in Sweden. It also presents an overview of Swedish taxation of labour income, offers calculations on the development in effective marginal tax rates and participation tax rates, and estimates, using the difference-in-differences method, the impact of tax incentives on employment rates of elderly workers. After this background, we ponder possibilities for reforming the Swedish tax system to improve its labour market impacts. We suggest better targeting the earned income tax credit at families and low-income workers, lowering the top marginal tax rates, and maintaining the tax incentives for older workers.

Keywords: Optimal taxation; labour income taxation; labour supply; taxable income; Swedish tax system.

JEL-codes: H21; H24; J22

73 pages, February 1, 2011

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