Tax Evasion and Swedish Supergroups

ABBA-early-costumesLike any American who has ever been to a dance or listened to the radio, I’ve heard ABBA’s “Dancing Queen.”[fn1] But in the last week or so, I’ve learned a couple new things about them. A week ago, listening to Sound Opinions’s Valentine’s Day episode, I learned that the band was made up of two married couples.[fn2] And yesterday, thanks to several friends on Facebook, I learned that (a) ABBA used to dress outrageously, and (b) it was apparently for tax reasons.

Specifically, ABBA claims that under Swedish law, they could deduct the cost of their costumes if they were so outrageous that the costumes couldn’t be used for everyday clothing.[fn3]

So how effective was their tax advice? And how would the U.S. income tax treat their clothing? Let’s explore.

Swedish Tax Deductions

In 1980, the top marginal tax rate in Sweden appears to have been 85%. That would mean that, for every 100 krona that ABBA earned, it would take home 15 krona. As a result, wealthy Swedes routinely used aggressive, and sometimes fraudulent, tax planning to reduce their taxes.[fn4]

So are deductible clothes a good way of reducing tax liability? Ultimately, I’m skeptical. A deduction (assuming Sweden does deductions in a manner similar to the U.S.) does reduce an individual’s tax liability, of course. But it reduces it by less than the amount a person spends to get that deduction. That is, if members ABBA spent 1,000 krona on deductible costumes, they would reduce their tax liability by 850 krona. But they would still have spent 150 more krona on clothing than they saved by making that clothing deductible. At best, then, the Swedish government helped to subsidize ABBA’s clothing. Still, I’m not sure how economically helpful that was; by the members’ own admission, they couldn’t wear that clothing on a day-to-day basis, and, presumably, their performance clothing was more expensive than jeans and t-shirts would have been.[fn5]

If part of their superstardom was the result of wearing crazy clothing, of course, then choosing to go that route (with or without a state subsidy) was a good move economically. But if the sole purpose were to reduce their taxes, outrageous clothing is a fairly expensive way to reduce their taxes.

In the U.S., of course, high-income individuals did use deductions to shelter income. But they generally did it by putting down a little cash and a lot of borrowed money, and then taking depreciation deductions triggered by borrowed money. In addition, the debt tended to be nonrecourse, so the taxpayers weren’t personally liable for paying it back.[fn6] I can’t imagine that the members of ABBA leveraged the purchase of their costumes, so I can’t imagine that their outrageous costumes functioned as a tax shelter.

U.S. Taxes and Uniforms

What if ABBA had been a U.S. band? Under the U.S. federal income tax, business expenses are generally deductible while personal expenses are generally not. Clothing is usually a personal expense. Work uniforms, of course, fall somewhere in the spectrum between personal and business expenses. As a result, the I.R.S. has ruled that taxpayers can deduct the cost of acquiring and maintaining uniforms where (a) the uniforms are required as a condition of employment, and (b) the uniforms are not suitable for everyday wear.

The American ABBA would probably meet the second requirement; the first, though, would appear problematic. An American ABBA would have been forced, I fear, to invest in traditional real estate and film tax shelters if they wanted to aggressively reduce their U.S. tax liability.

[fn1] Though, frankly, my familiarity with ABBA revolves more around “Knowing Me, Knowing You.”

[fn2] This may well be common knowledge, of course: most of what I know about ABBA is (a) they’re Swedish, and (b) there have been a couple jazz covers of their songs. Oh, and (c) there was a Broadway musical a couple years back put together from their songs.

[fn3] My impression, of course, is that multinational pop stars can wear whatever they want for everyday clothing, but I’ll give them the benefit of the doubt that, in fact, they didn’t.

[fn4] It’s worth noting that such pervasive tax avoidance among the rich can limit the progressivity of a tax-and-transfer system, as even some Swedish economists argued.

[fn5] Then again, maybe not. I really don’t know.

[fn6] That is, an investor would by a building for $1 million. She would put down $10,000 of her own money and borrow $990,000. Then she would depreciate the building; if the depreciable life of the building were 39 years and she used the straight-line method, she could deduct more than $25,000 each year. If she paid taxes at the top marginal tax rate (in 1980) of 70%, that deduction would reduce her tax bill almost $18,000, meaning she’d more than paid for her personal investment in the first year.

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