Johan Norberg: A low flat tax would be incredible important to stimulate work, risk and innovation

Our ex-president, Ion Iliescu, used to speak about the Swedish social and economic model as “the wonder-solution” for Romania’s development. What does a Swedish think about this model?

I am not sure if he really knows what the model that created Sweden’s success was like. Sweden was one of the richest and most developed countries in the world in the 1950s. By then, Sweden actually had lower taxes and a more open economy than the rest of Western Europe and the USA. Sweden got rich thanks to free markets and free trade.

I think that Iliescu thinks of high taxes and social spending in Sweden. But that came much later, in the 1970s, when we could afford it. Had we introduced it when we were poorer we might not have been as rich as we are today. All countries have to become rich first, before they begin to spend the resources.

But despite the fact that we did it in the right sequence, we have been hurt economically and socially by the high taxes. In 1970 Sweden was the 4^th richest country in the world, today, we are the 14^th. It has also meant that in the sectors where the government is the strongest, social policies and the labour market it has reduced incentives to work, and meant that young people and immigrants to a very large extent are out of work – and the labour market statistics – for ever. In many ways it is a social tragedy that the current Swedish government is trying to fix by reducing taxes and lowering benefits.

The Swedish model comes at a price. You have to be very certain that you are willing to pay that price before you introduce it.

The Northern-European countries managed to keep their positions in the global competitiveness top (Denmark – the third position, Sweden – the fourth position, Norway – 16, Iceland - 23), despite the idea that high taxation, a strong public sector and consistent social protection are incompatible with economic efficiency.

Thee are different situations here so it’s difficult to talk about them all at once. Norway gets away with it because of oil revenue. Iceland on the other hand is a very liberal and deregulated economy and Denmark actually has one of Europe’s most deregulated labour markets.

But why Sweden? Partly because our tax-and-spending policies ran into a huge crisis in the early 1990s so we had to begin to deregulate the economy and make it open for competition,at least in the big product markets and for the big companies. So apart from the taxes, compared to the continent, Sweden is now in many ways a more liberal economy.

Why German and French investors, where the fiscal burden is a little softer then in Sweden, are relocating their businesses in the East at such a fast pace that politicians accuse them of „unpatriotism”, while in your country the amount of „exported” capital seems rather small?

Well, most of the new “Swedish jobs” are created abroad, and many of the biggest companies are now owned by other countries. But sure, compared to Germany and France we’re better of. One reason is that the Swedish social democrats have always been friends with big business. They give them exceptions, privileges and lower taxes to make them stay. The corporate tax in Sweden is a flat 28 percent compared to more than 30 and often progressive rates in he likes of Germany and France. A government that is as big as the Swedish can’t be financed by taxing the richest and the capital, because it can leave. Instead, it is normal people and those with the lowest incomes who can’t move who have to pay the bulk of the welfare state. In that way it is really a very unfair system.

Do you think that the flat taxation of profit and salaries, as in Romania, would be more suitable for Sweden?

Oh yes. I think a low flat tax would be incredible important to stimulate work, risk and innovation. But it is also a matter of justice. If someone makes money it’s his, not the governments’. As John Stuart Mill said, taxing those who educate themselves more and work harder at a higher rate is a way of punishing education and hard work.

Statistics show that ¼ of world’s countries consume ¾ of the planet’s resources and commodities. May we speak about a form of injustice that has its roots in the colonial empires’ age? Is globalization making the rich become richer and the poor, poorer?

Oh, no, no, no. That’s an old myth. The reason why 20 percent of the world’s population consume 80 percent of its resources every day – energy, clothes, computers and cars – is that they produce 80 percent of those resources. The 20 percent freest people on earth produce 80 percent of the resources. That is not the problem. The problem is that the other 80 percent are not as free to invest, produce and trade as the others, so that they can also produce that much. There is an unequal distribution in the world, and that is because of the unequal distribution of capitalism. Those who have it grow rich, those who don’t stay poor.

What globalization has meant is that those freedoms are extended to more people, and the result is yes – the rich get richer, but so does the poor. And they often have more to gain from competition that forces companies to be better, more efficient and produce cheaper goods. Bill Gates can afford it anyway. The rich and powerful with contacts can always make it in any system. It’s the poor, without connections and power, who need a free market with freedom to sell your labour, start companies without being taxed and regulated to death and buy what you need freely from anyone you choose. It’s not a coincidence that extreme poverty and chronic hunger in developing countries have been halved in these three decades of globalization, and that growth and poverty reduction is the fastest in the countries that have opened their markets.