In 2004 the Swedish inheritance tax and gift tax was abolished by a unanimous vote in the Riksdag. In a new book ”Ten years without the Swedish inheritance tax. Mourned by no one – missed by few”, by Amanda Wollstad and myself, we tell the history of the inheritance tax, its abolition and what consequences it had on Swedish business owners and tax revenues.

The Swedish inheritance tax has existed in various permutations since the 17th century. The tax was assessed against property acquired through inheritance, bequest and, in some cases, life insurance. The tax was calculated on the value of the heir’s share of the estate, was progressive and varied depending upon the tax class to which the heir belonged. The inheritance tax rate reached a record high in 1983, with a top rate of 70 percent applicable to spouses and children. The phase-out commenced a few years later. In 2004, the year when it was repealed, the tax rate was 30 percent. The gift tax was calculated likewise.

Inheritance and gift taxes were never a substantial source of income for the Swedish state. Revenue from inheritance and gift taxes reached its zenith in the 1930s at about 0.3 percent of GDP. When the inheritance tax was repealed, the income equaled about 0.15 percent of GDP. The main reasons have instead been based on notions of fairness and wealth redistribution, and to complement and legitimise other tax legislation, such as the wealth tax.

The classic example of the destructive impact of inheritance tax was the surviving spouse who could no longer afford to live in the heavily taxed family home because all assets were tied up in the property. Likewise, many families were forced to sell family homes and holiday cottages. Such cases were far from unusual and even relatively low sums of tax due could cause tremendous personal harm. This may partly be because Swedes are, by international comparison, considered as having little readily available capital. The household savings rate is also low, perhaps due to high trust in collective welfare systems and the social safety net.

The major problem with inheritance tax arose in family businesses in connection with intergenerational succession. These problems had much more profound consequences upon society in general and the Swedish economy. The basis for taxation, even with the relief rules introduced on several occasions specifically to lighten the burden on small and family businesses, often consisted of tied assets. Business owners were compelled to withdraw liquid assets from the business. The income, taxed as dividends, was then used to pay inheritance tax. Even if the company had prepared for the distribution of the estate, tax planning takes time, energy and sometimes money away from the core operations of the business. It was not unusual that inheritance tax drained companies of so much capital that their future development was endangered.

Families like the Wallenbergs changed their core business into a foundation to secure its future. Others simply left the country, taking their fortunes and businesses with them. Tetra Pak founder Ruben Rausing, IKEA founder Ingvar Kamprad and industrialist Fredrik Lundberg all chose to emigrate, mainly due to Swedish tax policy.

In 2002, the Social Democratic government appointed a parliamentary inquiry to review and evaluate taxes on ownership. There seems to have been growing understanding among Social Democrats of the problems related to these taxes. There was also rising concern about how Swedish taxes on capital worked in a globalised world.

The parliamentary inquiry suggested in June 2004 substantial reductions of the inheritance and gift tax. But this was certainly not enough. Protests from entrepreneurs were huge and the response to the proposal was very critical.

In September 2004 the Social Democrats, the Green Party and the Left Party presented the news about the budget bill for 2005. They had all agreed to repeal the inheritance and gift tax altogether. The government wrote, “For reasons including improving conditions for running a business, the inheritance and gift tax is repealed, which will facilitate generational succession.”

The ongoing attempts to craft exemptions and provide relief to small enterprises and family-owned businesses had proven inadequate. Politicians finally realised that it was not possible to exempt, in any simple or predictable way, certain companies from the destructive effects of the inheritance tax without simultaneously undermining the foundations of the tax as a whole. I think German politicians, after Karlsruhe’s verdict, now face the same challenge.

The abolition of inheritance and gift tax marked the start of a broader debate on ownership issues in Sweden, a debate that eventually led to the abolition of wealth tax in 2007 and a more reasonable taxation of owner-led corporations. These reforms were made by both a Social Democratic government led by Göran Persson, and followed up upon by Fredrik Reinfeldt’s centre-right government.

The repeal of these destructive taxes has given Sweden a smarter tax system and has brought entrepreneurs and investment capital back to the country. A smarter tax system generates higher economic growth and thus higher tax revenues. The tax ratio declined from 51% of GDP in 2000 to 44% in 2014, even as tax income increased by SEK 260bn, adjusted for inflation. This is the result of several measures including the repeal of gift, inheritance and net wealth taxes and the institution of the in-work tax credit, which has meant that more people have jobs to go to.

Today Ingvar Kamprad and other entrepreneurs have moved back to Sweden and Swedish family business owners do not need to worry any more about inheritance tax planning. The political support for these reforms is strong, only the Left Party has changed its policy since 2004. Sweden still has the highest marginal tax rate in the world and taxes savings at nearly double the rate in effect elsewhere. We still desperately need lower taxes. But foreign readers of our new book might find some interesting facts and experiences from the Swedish inheritance tax reform in 2004.

Anders Ydstedt is a partner at Scantech Strategy Advisors, which advises major Swedish industry and business organisations. In 2004, he worked as a campaign manager at the Confederation of Swedish Enterprise against the inheritance tax.