It was during my jog this evening, precisely as I wended my way under the Escheresque arches of Stadshuset, that it all began to make sense. How does Sweden manage to have both sky-high taxes and a quality of life that is the envy of the world? Where is the engine in this economy? If there is not some kind of virtuous circle operating, then where is the sleight of hand? Are Swedes climbing real stairs towards economic prosperity, or are they living in one of Escher’s illusory worlds, forever expending themselves on the climb, only to end up whence they came?

I could have found the answer earlier had I paid better attention to my own recent behaviour as an economic agent. Last week I bought myself a gorgeous Apple flat-panel monitor. Not because it was cheap, mind youSo it turns out this post was just lustful research in disguise.. On the contrary, I bought it because it was rather expensive. In fact, it turns out that the more expensive it is, the more I can deduct it from taxesSure, it’s akin to the old “sale” ruse, but it wouldn’t be old if it didn’t work, would it?.

That’s because I have an egetföretag, a legal vessel of sorts for paying taxes on the freelance writing, editing, developing and designing I do, both for fun and for profit. And boy are there taxes to pay. An example: Let’s say I charge 1,000 for an article. The buyer pays 25% VAT on top of that, in effect handing me 1,250. I end up paying the state not just the VAT but also around two thirds of the original 1,000 in taxes, both as corporate/income tax, and as payroll tax of sorts (I am my own employee). The remaining 350 or so is cash in the bank (or, should I choose to spend it at H&M, 25 further percent goes to VAT).

BUT. There is one glorious loophole. I can deduct the stuff I buy for my egetföretag from my firm’s pre-tax income. Continuing the example above, then: If instead of buying nothing — and being left with 350 — I buy a nice designer office chair for 1,000 plus VAT, I will pay exactly nothing in taxes. That’s because the VATs cancel themselves out, and my net income is effectively zero. But I did get a chair worth 1,000 for 350 in the process somehowBy the way, if my understanding of Swedish tax law is egregiously fallacious and I am committing multiple felonies, I DO NOT want to hear about it..

This explains a lot more than the purchase of my flat-panel monitor. It explains why virtually every single street-facing Stockholm office I can walk by is a showcase for the latest designer furniture. It explains Swedish companies’ aggressive upgrade cycles for technologies, their employees’ early adopter mentality, their Saab company cars and even their entertaining of clients on Stureplan.

Of course, other countries also let businesses, small and large, deduct operating expenses and investment spending from pretax revenues, but only in Sweden is the incentive to take advantage of the “sale effect” so hugeYes, corporate taxes in Sweden are below the European average, but payroll taxes are not. Employees are quite expensive to companies in Sweden, though they are also quite productive..

How might this microeconomic skewing of incentives have macro-level effects on aggregate demand? Although taking out “clients” for a 7-course tasting menu at Vassa Eggen might not lead to the development of anything but friends’ bellies, much of the other additional spending is in fact investment spending. Swedish companies are in effect being technologically innovative in order to avoid taxes. I think this means that for Sweden’s national income accounting, there is a smaller C (consumption) and a larger I (Investment spending) than there would be if there were lower taxes. And that is good for small countries that export to the world.

Of course, now that I am on a roll, let me ruin my theory by having it explain too much. For example, it could also explain why wages are relatively low: employees prefer to avoid paying income tax but instead get renumerated via company schemes (think company car, the work laptop at home, the company 3G phone…). Or how about letting tax incentives explain why Swedes are such famous globetrotters — perhaps because abroad, low-tax environments increase their buying power?

Or my favorite: I recently wrote an article (not yet published) on the occasion of 2005 being the Year of Design in Sweden, about the history of Swedish design. My thesis was that modern Swedish design is so successful because it is the result of a marriage between two specific historical traits — the older artisanal tradition that pushed quality, and the newer idea that design should serve to better the lives of the “common people.” IKEA, for example, leverages both notions.

But perhaps I was wrong. Perhaps good modern Swedish design got its break precisely because so much of it, like the Hasselblad camera or Källemo furniture, is so expensive, and Swedes collectively decided it would look great back at the office, where they could deduct it from taxable income.