Danes Love Their High Taxes

Most voters oppose government plans to boost net incomes

Its citizens pay some of the highest taxes in the world, so an administration that promises to slash them should be on to the political equivalent of a slam dunk.

Not in Denmark, where such a proposal has been met with strong opposition and a drop in support for Prime Minister Lars Loekke Rasmussen's center-right government.

The government's plan involves cutting the top rate of income tax by 5 percentage points and raising personal allowances so as to boost the salaries of the lowest earners by an average of 7 percent. Those with gross annual salaries above 1 million kroner ($151,000) would continue to pay a top rate of 58.3 percent.

The main idea behind the change, which is now being discussed by parliament, is to make salaried work more attractive and woo some 40,000 people off welfare in the process. Not a bad plan for a country that faces labor shortages and growing pressure on its costly social safety net from an aging population.

“It's our firm conviction that taxes plays a decisive role in how much people are prepared to work,” Finance Minister Claus Hjort Frederkisen told Bloomberg in a recent interview.

In addition to the tax cuts, the long-term unemployed would be rewarded with a 30,000 krone bonus ($4,500) for accepting a job if they’ve been on benefits for more than a year. Government calculations suggest the balance of the proposed changes would put more than 2,000 kroner ($300) a month into the pockets of 100,000 people who will be pushed into working more. 

The plan would be funded by reducing interest rate payment deductions, cutting green incentives and capping student support as well as child support in large families.

To the uninitiated, the polls don’t make a lot of sense. Danish income tax is about three times the OECD average (although, unlike in most other countries, it also covers social security contributions), while the overall tax burden (which measures total receipts from taxes and social contributions after deductions), is in excess of 50 percent of gross domestic product, the highest in Europe. 

Dig deeper, however, and the result becomes more  apparent.

The first is cultural. Equality is deeply ingrained in a society that resents individuality and success – there’s even a set of principles, the Law of Jante, that explains why driving a Ferrari around Copenhagen isn't considered cool. 

The second is practical. Danes treasure their welfare state and are fully conscious of the fact that it costs money. High taxes ensure that "anyone who ends up in economic trouble or bad health is taken care of," says Rene Christensen, a member of the Danish People's Party who heads parliament's finance committee. 

According to Rune Stubager, a professor of political science at Aarhus University, the problem with the government's plan is that it's essentially asking Danes to choose between preserving their beloved welfare state and paying a little less tax. "That's an easy choice to make, particularly when a cut to the top marginal rate benefits only a small group of voters," he said.

As the locals like to remind themselves, Denmark regularly tops the international rankings on both welfare and happiness. Perhaps it's no coincidence then that their word for taxes, skat, also means “sweetheart”.

 

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