Jacob Christensen

The Almedal Week came and went without making too much of an impact on the general public. One obvious reason for this is that it is summer holiday time in Sweden and when the Swedes go on holiday, they do so big time. Another, that the parties are saving their ammunition for the election campaign which will only really start sometime during mid-August.

However, we did see one potentially important – and very dangerous – initiative from the centre-right “alliance“: In an announcement the four party leaders promised to abolish the property tax and replace it with some kind of local government charge.

Opposition to the property tax – along with energy taxes – has long been a defining issue for the small and struggling Christian Democrat Party and the property tax is also an effective populist issue for politicians and media in a situation where house prices in the larger cities have litterally exploded during the last 6-7 years.

Why – and How – Property Taxes Are a Political Issue

The thing about family homes (houses or appartments) is that they have a double nature: At the same time they are a consumer good and an investment. Most consumer goods lose value as you use them – for instance a house needs constant repairs and occasional modernisations – while an investment is supposed to bring you some rate of return. The consumer good aspect is immediately obvious to home-owners, the investment aspect less so. But as noted above, economic and demographic developments have meant that the rate of return on owning a house or an appartment in places like Malmö, Göteborg and especially Stockholm has been very good indeed.

And so what, you may ask.

Well, the political problem is that property taxes build on some kind of assessment of the property’s market value which can only be realised if you either sell your property or take a loan against security in the property. Most home owners, on the other hand, will be paying taxes out of their current income which does not co-vary with the market value of the property.

This invariably leads to the by-now-familiar “taxes force Ordinary Guy out of his seaside home that he has owned for 60 years”-stories in the media. And if there is one thing politicians like, it is being seen to defend Mr. Ordinary Guy. Especially if he is retired.

One slightly odd aspect of the story is that the Swedish Christian Democrats on the one hand have an ideological preference for home ownership but on the other hand have the strongest support in more peripheral parts of the country. On the other hand, the anti-property tax stance could be a menas to attracting socially conservative voters in the larger cities.

The “Alliance’s” Proposal

The proposal presented by the centre-right contains two steps: 1. A promise to immediately frezze the taxing value of properties which means that taxes in 2007 would be on the same level as in 2006. 2. The introduction for the tax year of 2008 of “a low local government charge” which is promised to be independent of properties’ market value. (Note the rhetoric: Instead of a heavy property tax, you will get a low charge).

The parties haven’t come clear about what kind of tax the new local government charge will be and there are several good reasons for this. A guess could be that this kind of charge will have to rely on some parametres of the property that are unrelated to its market price: It could be based on size (households with big houses will pay more, bad for you if you are a large family which has moved to a cheap neighbourhood), the number of persons in the household (yes, the famous community charge which helped bring down Lady Thatcher) or a standard sum for all properties or households (again some kind of poll tax). Finally, you could shift the charge to a tax on water, sewerage and garbage (again, bad news for people with children).

Media Comments and the Economists’ View

In the public, the proposal to abolish the property tax hasn’t been med with universal acclaim. The Social Democrats have duly criticised the proposal – but that isn’t surprising, of cause – and the economist Lars Calmfors has also made negative comments about it

In general, comments have concentrated on the probable effects on the personal distribution of income – if you own a house or and appartment, you win; if you will have to buy an appartment or a house, you lose – and some have also discussed regional effects – Stockholmers will win, people in the countryside will lose.

What has surprised me is that there has been very little discussion of the consequences and abolition of property taxes will have on the over-all income of the state and local authorities, the distribution of the tax burden between personal and capital income and finally the taxation on different kinds of capital income. My guess is that an isolated abolition of property taxes will drive up the price of property – especially in the larger cities – and that investments will go from investments in shares and the like to investments in property.

Finally, the property tax discussion has a fascinating Danish parallel. The thing is that Danish economists for a long time have argued that in a global economy, taxes have to shift from mobile sources of income – such as wages and rents – to immobile sources in order to provide a reliable tax base. Yes indeed, economists argue that property taxes ought to go up, not be abolished.

The thuds you hear are not the sound of Zidane’s head hitting Mazzerati’s thorax. It is the sound of economists banging their heads against the nearest wall in desperation.

PS: In case you wonder – this post does not amount to an endorsal of the Swedish Social Democrats’ housing policy. The Social Democratic approach to housing policy can best be described as the continued implementation of a Soviet-style planned economy. It hasn’t stopped the development of ethnic ghettos in the larger cities and the only real benefactors are people with connections and Social Democratic apparatchiks.