Shaping Tomorrow’s Taxation: Why Sweden Needs an Interdisciplinary Research Center

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There is a need to adapt the Swedish tax system to challenges from new business models based on new technology, globalization, and sustainability requirements. The rapidly changing world, where Sweden is not an isolated player but interacts on a global scale, calls for an in-depth analysis of how to design a sustainable and legitimate tax system that finances our future public welfare. The need to reform the Swedish tax system is not new, several proposals have been presented. However, this is the first time that the creation of an interdisciplinary research group featuring a broad range of competences is proposed, involving public finance, technical competences, anthropology and legal dogmatics. In this article, we argue for the need to create an interdisciplinary tax research center and report on an inspiring international workshop “Taxation and the Rule of Law in a digital world: How, where, and by whom?” held at the Pufendorf Institute in Lund, April 2024.

1 Introduction

Many tax systems in the world, including the Swedish, were thought out and designed in times that look very different than today. Although they had a national focus, the international corporate tax rules stem from agreements made by the League of Nations in the 1920s. In the late 1980s and 1990s, many nations, including Sweden, undertook major tax reforms to respond to the economic conditions and challenges posed in that particular era. Since then, most tax systems have been altered and mended, and international cooperation on corporate taxation has increased. But despite this, the basic answers to what, where, and whom to tax remain, while the world has changed drastically, making it harder to define, measure, and control taxation. We argue that it is time for a major reform, but to do so more knowledge is needed.

Globalization continues and the use of modern technology, not least digitalization, has radically transformed the economy. Today it is possible to consume, invest, receive an education, and work without being physically present. Our contemporary world has in certain regards become borderless, where many businesses and individuals can operate without considering national borders. Yet, taxation has not followed suit. Taxation is still a national capacity that relies on space and time and is designed for a world where the value of activities can both be measured and assigned to a specific geographical location. To tax we need to be able to determine what to tax, typically this is value creation measured as income, where to tax this income, that is in what jurisdiction, to whom the income belongs, that is what production factor created the income, when the income was conducted and finally how big the income is. While national tax laws attempt to provide clear and precise answers to these questions, it is undisputed that they have not adapted to the digital shift in our economy. The normative requirements of a good tax system – legitimacy, efficiency, transparency, simplicity, and fairness – are not fulfilled. Redesigning and finding new applicable tax rules need a multi-disciplinary approach.

This article argues for a more proactive approach to tax reform and not just as a reaction to existing and outdated rules unfit to solve modern challenges. Contemporary responses include reactive amendments adding to current tax legislation, resulting in an increasingly complex and overcomplicated regulatory framework.1 We report from a recent interdisciplinary and international workshop “Taxation and the Rule of Law in a digital world: How, where, and by whom?”. The broad and insightful discussion underlined an urgent need to form a Swedish tax center where researchers from across disciplines can work on policies one step ahead of, or at least in phase with, structural changes.

The legal tax framework is increasingly being challenged by globalization and technological advances that enable global supply chains, the rise of intangible assets and data-driven value chains, cross-border digital trade, 3D printing, as well as artificial intelligence (AI), and automation of analytical work. The ultimate challenge arises from a disruption of the link between localization and identification of a state’s power to tax. In short, digitalization is challenging the tax system, and by extension the ability to finance public welfare, not in the shape of a single disruptive revolution, but through a potentially large number of small disruptions and perturbations that accumulate over time.

For instance, digitalization shifts the balance between tangible and intangible assets. Digitization of records and information, the generation of data in digital networks, and the software bias in innovation and industry,2 all contribute to the increasing importance of intangible assets. Furthermore, computational capacity and bandwidth at falling cost make it possible to substitute physical capital (digital hardware) with computing and software as a service, which in turn enables international software-based and data-driven value chains. In a digitalized economy, it is thus much harder to disentangle value creation and assign it properly to a physical place or a specific actor. These intangible and often knowledge-intensive assets are also much easier to relocate and distribute across several geographical locations. Consequently, they are becoming increasingly hard to tax according to traditional rules and current tax regulations.

Today, it is possible for firms to create value without being physically present in a specific geographical market. Large tech companies, like Amazon, Google, Meta, Apple, and Microsoft create value in Sweden but, by traditional standards, are untaxed for the profits arising from their sales in Sweden as they lack physical presence. Add to this that AI may be supplied as an international software-based and data-driven service that is used to substitute labor across several locations. E-commerce allows supply and demand to be matched on a nearly global market. Consequently, individual consumers and small businesses can engage in economic activities on an international scale which used to be the privilege of large companies with the resources necessary to internationalize their business.

Individuals may also unbundle economic activities from location as they are able to work remotely both on a regional and international scale. They can live in one place, work in a second, make investments in a third, consume education in a fourth, and take part in public welfare in a fifth. This raises issues about appropriate tax collection while it may create incentives for individuals to plan strategically to minimize taxation.3 Although there are many reasons for relocating activities, taxes seem to matter for those choices.4

Taxation is still a national capacity, and each country has sovereignty over tax matters, but international tax cooperation has increased. Under the lead of OECD but with the EU and even the UN aiming to take a more active role concerning mainly corporate taxation. Examples of results coming out of international cooperation is the minimum effective corporate tax rate (Pillar II) and suggestions for a redistribution of corporate income tax (Pillar I). The proposed international tax regulations are very complex and administratively burdensome for both tax authorities and taxpayers. The question is also if they really tackle the problem or just add more complexity and thus costs. Or as Marian puts it “The two-pillar framework may indeed improve income tax collection and compliance. But it does not transcend the challenge of the current data economy. It is still an attempt to square the circle—to force a century-old framework of taxation designed for a tangible economy into the reality of the data economy”.5

The impact of digitalization on the Swedish tax system may be large as Sweden has among the highest marginal tax rates on labor in the world and a highly decentralized welfare system with large differences in both tax rates and tax bases across the country’s 290 municipalities. The Swedish tax system also exhibits an unusually large difference in taxation between labor and capital. All these characteristics make the Swedish tax system more vulnerable to increased labor mobility enabled by digitalization. None of these technology-driven changes is likely to overhaul the Swedish tax system on its own, but together they may undermine the ability to generate enough tax revenue to finance the public sector. Ultimately, it is an empirical question to estimate the magnitude of the effects.

Even though basically all stakeholders in the tax arena see a need for tax reform none of the many suggestions6 have received the traction needed to be taken up by a political party and make it to the Swedish Parliament. Furthermore, the proposals are mainly reactive and relate to the existing rules and tax system instead of addressing the contemporary economic reality. The complex patchwork of Swedish tax law with its manifold amendments is not geared to respond to the current challenges of the digital and borderless economy.

2 More research is needed to tackle new challenges and update the tax system

To tackle how structural changes caused by digitalization may challenge the current tax system multi- and interdisciplinary work within the field of taxation is required. Several Swedish researchers both within tax, technology, and public welfare and from different disciplines have initiated such work: e.g., the Swedish Tax Force for the Future7 and Digitax at Lund University as well as CATS (Critical Approaches to Taxation and Society) Network at Göteborg University. Digitax is an Advanced Study Group at the Pufendorf Institute at Lund University during 2023–2024 that continues as a Theme during the academic year 2024 to 2025.

Our overarching goal is to create an multi- and interdisciplinary policy-relevant research center/environment on taxation in Lund. Despite the importance of taxation for financing the public sector, and for incentivizing certain activities (like entrepreneurship and innovations) and disincentivizing other activities (like climate change) there is no interdisciplinary policy-relevant tax research platform in Sweden. Compared to when the last tax reform was implemented, we have much more knowledge about taxation’s impact on society. In economics, new methods and access to data have drastically increased the knowledge about taxation and its effects on individual and firm behavior. Moreover, new fields have emerged such as behavioral economics8, economic psychology9, critical tax theory10, and fiscal sociology11 and anthropology.12

The importance of interdisciplinary expertise cannot be stressed enough when it comes to forming this research network. There is an obvious need for technical expertise to understand how technological changes affect the economy. This requires scholars in tax law and tax economy but also recognizes a need to address the social impact. We look outside Sweden for inspiration, not only on actual tax policies but also on how to set up an interdisciplinary research environment for taxation, e.g. Digitax in Antwerpen. Furthermore, we think Lund University is the ideal place in Sweden for hosting this research environment. Partly because we have already established a well-functioning interdisciplinary network, partly because we have a great potential to expand the group by providing graduate programs, and not least the very location in between Stockholm and Brussels (where national versus EU tax policies are designed).

Based on existing work, we have so far developed a conceptual framework to identify and categorize relevant issues arising from digitalization and structural change along three dimensions: 1) geography, 2) value creation, and 3) complexity (interdependences). Geographical issues arise from shifts in the link between location and economic activities, but also the increased geographical spread. Globalization proliferates and the digitalization of market activities further fuels this expansion. Issues related to value creation capture shifts in the distribution and coordination of economic activities within and between actors, in and between locations. Complexity issues arise from the increased interdependencies between different types of actors and activities in the digitalized economy, for example through the use of digital platforms and cloud services. New actors enter the tax arena and new business models in the digital economy proliferate. The complex issues and interdependency between countries, when national borders are erased and international organizations like the OECD steer the tax agenda, raise questions of legitimacy for the tax system and concerns around the democratic process of the new tax rules.

These are questions we will address, all focusing on how a sustainable future tax system could look.

• What, where, and whom should be taxed in a sustainable tax system? To develop a new tax system, it is crucial to determine what rules to follow and that these rules are sound. What should they be? Some of today’s rules are over a century old and may no longer be suitable for a global and digital world.

• How will the current tax system uphold the rule of law, transparency, and tax compliance compared to new rules and new ways to tax?

• What alternative tax bases could be taxed in the future? Data/information, energy, natural resources, revenue rather than income, fees rather than taxes, fictional income rather than real income? What are the pros and cons of different tax bases?

• What changes can be made on the public expenditure side? It is necessary and maybe even desirable to make changes to the expenditure side of the public sector to reduce the need for tax revenues.

• What method of cooperation can an interdisciplinary group apply to reach its goals? While legal dogmatics tend to interpret the law as it stands as an expression of the social contract, social sciences add a normative approach addressing questions of how tax laws should be designed.

3 Workshop on Taxation and the Rule of Law in a digital world

As a stepping-stone to acquiring state-of-the-art knowledge about digitalization and taxation, a workshop on the theme was organized and generously funded by Riksbankens Jubileumsfond. The workshop “Taxation and the Rule of Law in a digital world: How, where, and by whom?” was hosted by the Pufendorf Institute at Lund University between April 17 and 19, 2024. The aim of the workshop was twofold. First, to learn and be inspired by leading researchers and stakeholders in Europe working on the topics of digitalization and taxation in combination. Second, to bring together researchers and practitioners working on similar interests to establish future collaboration. The conference participants represented many stakeholders and actors in the tax arena: tax administrators, tax advisers, participants from international organizations, and tax scholars from across disciplines.

The conference covered five important and partly overlapping themes in separate panels briefly summarized below.

4 Conclusion

The workshop and discussions underlined that the opportunities and challenges posed by digitalization on the tax system need to be addressed in an interdisciplinary environment. This is urgent. If we are serious about ensuring fair, transparent, efficient, and legitimate tax systems and if we take seriously the principles of the rule of law, both in theory and in practice, we need to acknowledge the complexity of a changing society. Realizing that taxes and taxation have a profound impact on society, we see a great need for interdisciplinary collaboration to address future tax issues. Our workshop strengthened these beliefs of an interdisciplinary policy-relevant research environment but also pointed to a need to provide adequate education for future tax professionals. Despite our methodological differences and perspectives, we acknowledge a closer collaboration between academia and practitioners engaging in serious and constructive discussions in tax matters. We look forward to continuing the work and engaging with other Swedish – and international – tax practitioners and scholars.

Lotta Björklund Larsen, University of Exeter Business School; Cécile Brokelind, Department of Business Law, Lund University School of Economics and Management; Åsa Hansson, Departments of Economics and Society and Technology, Lund University, and Ratio; Teresa Simon-Almendal, Faculty of Law, Stockholm University.