Jobbskatteavdraget: the Swedish Credit That Flatters Low Pay

Swedish income tax has two components for most people. Municipal tax, set by each municipality and region and averaging around 32%, is charged on all taxable income. State income tax at 20% is charged only on income above a threshold, which is why Sweden's headline top rate of roughly 52% applies to a comparatively small share of earners.

Sitting against municipal tax is the jobbskatteavdrag, the earned income tax credit, introduced in stages from 2007 and expanded since.

How it works

• It applies only to income from work, not to pensions, benefits or capital income. That was the explicit policy intention: to widen the gap between working and not working.
• It is a credit against municipal tax rather than a deduction from income, so its value does not depend on the municipal rate in the way a deduction would.
• The amount rises with income across a lower range, reaches a maximum, and is then withdrawn at higher incomes.
• An enhanced version applies to those aged 66 and over who continue working, which is a deliberate incentive to delay retirement.

What it does to the effective rate

The withdrawal of the credit and the start of state income tax do not coincide exactly, which produces a band where both effects operate. The Swedish marginal rate curve is therefore steeper in the upper middle of the scale than the two statutory rates would suggest, which is the same phenomenon seen in the Netherlands, Finland and Italy.

What it does not touch

The credit reduces income tax. It does nothing about the employer contribution, the arbetsgivaravgift, charged at 31.42% on the entire salary with no ceiling. That contribution is invisible on the payslip and is the largest single element of the Swedish tax wedge, covered in Sweden's 31.42%.

The employee side also carries a pension contribution, which is largely offset by a corresponding credit, which is why Swedish payslips show a smaller employee contribution than most continental ones.

The other deductions

1. The grundavdrag, a basic allowance that varies with income on a formula, granted to everyone.
2. Commuting costs above an annual floor, which is set high enough that many commuters claim nothing.
3. ROT and RUT deductions, credits for home renovation and household services claimed at the point of purchase, which have become a substantial part of how Swedes buy such services.
4. Interest deductions, available at a percentage of interest paid against tax, which given Swedish household debt levels is significant.

The ROT and RUT arrangement is distinctive. Rather than claiming the credit on a return, the customer pays a reduced invoice and the provider claims the balance from the tax agency. It is administratively elegant and it made a large informal sector legitimate.

The municipal rate variation that the credit offsets is covered in Swedish municipal tax.