Introduction

The intensifying economic integration among industrialised countries implies new terms for households, companies and governments. It is characterised by rapidly decreasing costs of information, integration of financial markets, lower costs for transportation and easier access to foreign markets by deregulation and abolishment of trade barriers. This increases the possibilities for individuals and firms to choose location of work, savings and investment. At the same time, national governments face restricted potentials to enforce taxation and raise enough revenue to finance increasing expenditure demands. Although the ambition to achieve free trade in a broad sense is advocated by most economists, the possibility of supplying public goods and of pursuing an egalitarian policy becomes more limited. In this setting, governments of small countries like Sweden, which may be characterised as having a tradition of high ambitions concerning the ‘welfare state’, must consider how to respond and adjust to the development. This chapter is intended to give some insight into the theoretical and empirical aspects of this debate.

Stylised facts on tax policy in Sweden and other countries

Since 1960, general government outlays have increased from 30 per cent of GDP to roughly 50 per cent on average in 1999 among OECD countries. In Sweden, this ratio has even more markedly increased from 32 per cent to 58.4 per cent. At least in the long run, the bulk of these expenditures has to be financed by taxes (and social security contributions which closely resemble taxes in many respects).