COMMENTARY: A tax lesson from Scandinavia

Democratic Socialists are cheering Zohran Mamdani’s proposal to raise taxes on millionaires if elected mayor of New York City. They should take a closer look at Scandinavia’s experience with the idea.

Sweden and Denmark are often heralded as successful socialist models and praised for highly progressive tax structures that soak the rich. But these countries are not socialist, and their taxes are a lot flatter than you think.

Mamdani proposes an additional 2 percentage point tax on New Yorkers earning more than $1 million annually. With this addition to the city’s top income tax rate of 3.9 percent, its highest combined federal, state and city rate would rise to 52 percent.

If successful in pushing through his plan, Mamdani would still need state approval, and Gov. Kathy Hochul isn’t supportive. Still, Mamdani’s surprise win and political appeal, particularly to younger voters, suggest that tax progressivity will be an increasingly significant issue in elections, and not just in New York.

The more progressive a tax system, the more its tax burden rises with income. Other Democratic Socialists have long claimed it’s a matter of fairness, and they never tire of pointing to the Scandinavian model. More mainstream figures, ranging from the Nobel Laureate economist Paul Krugman to Bruce Springsteen, have also expressed admiration for Sweden’s welfare state.

But Sweden and Denmark aren’t nearly as socialist as people think, and their tax histories show the limits of tax progressivity.

Both have flirted with socialism and long since abandoned that dream. Today, their economies are among the world’s freest. Citizens can start and run businesses with little interference. They can exchange with whomever they want on whatever terms they want. They can accumulate savings, and the government will not inflate away their nest eggs. And they can acquire and use property knowing the state will protect their property rights.

This explains why leaders there have been at pains to explain to Americans that they are not, in fact, socialist.

The economic history of Denmark and Sweden was recently documented in a pair of studies published as part of the Fraser Institute’s Realities of Socialism project. Swedes and Danes know that a broad and well-funded welfare state cannot rely exclusively on tax revenue collected from a handful of high-income earners.

Sweden tried this in the 1970s, imposing suffocating taxes on entrepreneurs and investors, only to see a collapse in business investment and an exodus of successful and accomplished citizens. Among them was the founder of a furniture giant who moved to the Netherlands in 1973, bringing the foundation that owned IKEA with him.

The two greatest Swedish sports stars of that era, tennis player Björn Borg and Alpine skier Ingemar Stenmark, moved to Monaco. The famous director Ingmar Bergman was arrested for tax evasion while rehearsing for a play. Though the charges were dropped, Bergman suffered a nervous breakdown and swore never to film again in Sweden.

Following the disastrous experiment, Sweden undertook a major tax-code revision in 1990. It adopted a flatter personal income tax structure in which rates do not rise much as incomes rise. It also began to rely more heavily on taxation of purchases instead of income.

The country still has a high top personal income tax rate — the third highest among developed nations at 55 percent and slightly more than what Mamdani wants the wealthiest New Yorkers to pay. Because this rate kicks in at a relatively low income threshold, just 10 percent higher than the average wage, it’s also one of the flattest structures in the world.

The situation is similar in Denmark. These countries spend enormous sums on social transfers, but they have learned that the only way to pay is to have everyone — not just the wealthy — chip in.

Socialists are ignoring how progressive the U.S. system already is. A coming Fraser study shows that Sweden and Denmark have some of the least progressive tax systems in the Organisation for Economic Co-Operation and Development. America’s highest-tax states, including New York, have the most progressive structures.

It’s politically expedient to promise generous services by taxing the rich. However, in Scandinavia or Manhattan, sooner or later, they will run out of other people’s money.

Matthew D. Mitchell is a senior fellow with the Fraser Institute’s Centre for Human Freedom and an affiliated senior scholar with the Mercatus Center at George Mason University. Steven Globerman is a senior fellow and Addington Chair in Measurement at the Fraser Institute. They wrote this for InsideSources.com.