Wage tax on a rapidly changing Swedish financial sector

The financial crisis has triggered a renewed interest in the taxation of the financial sector. In Sweden, it has led to the establishment of a government committee that is to review possible remedies. Specifically, the mandate refers to the Danish wage tax as a possible inspiration for Sweden. On this background, Svenska Bankföreningen (Swedish Bankers’ Association) has asked Copenhagen Economics to review the consequence of putting in place a tax on gross wages in the financial sector.

In this report, we look into possible new taxation systems for the Swedish banking sector. The first best solution is to introduce some version of (at least close to) a full VAT system for financial services. Other solutions has been addressed, especially a possible wage tax on the financial sector. However, there is a substantial difference between a VAT on financial services supplied to customers residing in Sweden – the real VAT solution – and a wage tax on financial production in Sweden:

• A wage tax may well reduce the under-taxation of private consumers’ use of financial services, as a real VAT system would bring. However, it will at the same time compound an existing over-taxation of businesses’ purchases – in particular hurt smaller Swedish firms relying on Swedish banks for finance.
• Furthermore, it will reduce Swedish banks’ ability to compete from Swedish soil against competitors from other countries. As such, it will forces Swedish financial institutions to outsources and move jobs to low-cost countries.
• An introduction of such a tax in the coming years also fails to take into consideration the major transformation that digital technologies are bringing to the financial sector globally. It has allowed more-and-more of the value chain from customer contact to back-offices functions to be carried out by large IT-systems, and many new players are entering, not the least technology providers, the so-called FinTech industry.
• Eventually, this has profound implications for the functioning of wage tax, since the tax base – wages in the financial sector in Sweden – is likely to change a lot in the coming years and even more so if a wage tax is implemented. 

The study is commissioned by Svenska Bankforeningen