Government death by taxes

The taxes paid by Denmark's top earners is the focal point of the coming political season. The outcome remains uncertain, but the future of both the current government and the country's progressive tax system hang in the balance

A cornerstone of Denmark’s welfare state is a progressive tax system that levels the playing field for all Danes. Central to the system is the philosophy that the broadest shoulders should carry the greatest weight. In other words, the more you earn, the more tax you should pay.

But soon, the broadest shoulders might have a little weight lifted from them. Tax reform for Denmark’s top earners promises to be a central aspect of the coming political season, as the Liberal Party (Venstre) minority government attempts to follow through with a promise to lower the supplemental tax on the highest incomes, known as topskat, from 15 to 10 percent.

This was widely seen as a concession to libertarian support party Liberal Alliance (LA), which has made lowering the top tax rate as one of its key issues. LA leader Anders Samuelsen has threatened to withdraw his party’s support for the government – sparking a snap election – unless the government follows through with the tax cuts.

But another support party, the populist Danish People’s Party (DF), is opposed. Despite belonging to the ‘blue bloc’ of right-wing parties, it has always run on a left-wing, pro-welfare economic platform. Last December, deputy leader Søren Espersen told Altinget that his party had “no interest” in entering discussions about lowering the tax on the highest incomes.

Tax cuts for top earners is a divisive issue. A Norstat poll conducted last May found that 52 percent of voters are opposed to lowering the top tax rate, while only a third support the idea. This means that Venstre could risk upsetting a large percentage of voters should the proposed changes go through. Should it fail to implement the cuts, however, it could lose the support of LA and risk a new election.

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Frits Ahlefeldt-Laurvig

Frits Ahlefeldt-Laurvig

What is topskat?
Topskat is added on top of other municipal and state taxes on annual income over 507,934 kroner, or 42,330 a month, and currently stands at 15 percent. Should the proposed reforms pass, the rate will drop to 10 percent for income below one million kroner.

The number of Danes currently in the top tax bracket is at its lowest since it was introduced in 1994, due to tax reforms in recent years. A study conducted by the Economic Council of the Labour Movement (Arbejderbevægelsens Erhvervsråd) found that only 488,150 Danes paid topskat in 2014, down 50 percent from its peak in 2008.

The argument against the change
One of the more outspoken opponents of lowering the tax on the highest earners has been the Danish Confederation of Trade Unions (LO). The union fears that the move will lead to cuts in the welfare state, will increase inequality, and will fail to spur the economic growth its proponents claim will follow.

“This is a tax on the very richest in society, people that earn more than half a million annually. So if you lower it, while at the same time reducing services, then you are acting very harmfully in regard to wealth distribution,” says LO economist Morten Aastrup Jørgensen. “The population is also growing and in the future we will have more elderly people and children, so the state will need the revenue.”

According to LO, lowering the tax will have only a small impact on average earnings. A person making 600,000 kroner will receive around 4,000 extra a year, while a person making 8,000,000 will earn a further 342,000 annually. Those in the top tax bracket pay a marginal tax of 56.2 percent, which is the eight highest of the OECD countries. For the average earner that number drops down to 42.5, or the nineteenth lowest, just under the US and Slovakia.

Proponents of lowering the tax on the highest earners claim that the move will finance itself through increased productivity and job growth. But Jørgensen points out that numbers from the Ministry of Finance show that the direct revenue loss will be 5.2 billion kroner. Even when taking into consideration the potential revenue generated from the predicted job growth resulting from the tax cut, the state would end up 2.7 billion kroner worse off. And because the government has pledged not to increase taxes across the board, this revenue loss cannot be made up through other forms of taxation.

But the issue is also a matter of principle, says Jørgensen.

“We are big proponents of a progressive tax system. People make a lot of money here because they have benefitted from the services society offers. You are able to hire well-educated employees, childcare is available, and you have most likely gone through an expensive university education offered to you for free.”

LO also fears that lowering the tax will increase inequality – measured by the ‘Gini coefficient’ – and decrease social mobility.

“Lowering the top rate won’t change the Gini coefficient by too many points, but it will have an effect. Reforms in recent years have already created a slippery slope, which is resulting in the rich getting even richer and the poorest getting poorer.”

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The argument for the change
Among the most vocal proponents of lowering, and even eliminating, the topskat is free-market think tank CEPOS.
“These are some of the most growth-hindering taxes out there,” argues CEPOS’s chief economist Mads Lundby Hansen.

“Currently, we have very limited economic growth, and that is an issue we need to address. We also don’t believe the change will lead to cuts in government spending, even though we believe that would be a good idea. The former government’s Productivity Commission found that the tax cuts will actually pay for themselves through increased productivity. Lowering the rate will not lead to any problems for the state.”

In his view, opposition to the reforms are based on “scare tactics” that attempt to paint a bleak picture of welfare cuts that, he claims, will not materialise.

Hansen is also unconcerned by growing inequality. He points out that Denmark is already one of the most equal countries in the world. Even with the changes resulting from lowering the topskat, Denmark will remain a more equal country than both Sweden and Finland.

Hansen also argues that lowering the top tax rate will help attract more highly-educated foreigners to the country. He points out that the so-called expert tax (forskerordningen), which allows foreign researchers and key employees to pay just 31.92 percent tax for up to five years, has been hugely successful.

Jørgensen contends, however, that the level of taxation is not a high priority for people when choosing where to live.
“Studies have shown that taxes play only a limited role when people are deciding which country to live in. People also place childcare and welfare highly on their list of priorities. The OECD has researched how taxation impacts migration and found it hard to establish a clear correlation. Studies have also offered no proof that tax rates have an influence on Danes moving abroad.”

But Hansen doesn’t believe LO is being sincere in its opposition to the tax cuts and feels that the union is just “playing politics”.

“You should look for their criticism of changes to the top tax rate during the left-wing Socialdemokraterne government – it doesn’t exist. The only reason they are coming out against it now is because there is a right-wing government in power. There is a broad consensus among economists that the changes will be beneficial.”

Jørgensen dismisses this criticism and claims that part of the problem is that CEPOS and Hansen are trying to frame the cuts solely as a growth issue, whereas it ought to be seen as part of a bigger picture.

“This is a political issue and Mads (Hansen) is trying to frame it as solely a question of growth. This is also a question of wealth distribution. If CEPOS believes that lowering the top tax rate will not lead to cuts in services, or that they will end up paying for themselves, then they must be including unknown factors in their calculations. We can only refer to the numbers from the Ministry of Finance, and those show that the cuts will end up costing the state 2.7 billion, and we will have to find that money somewhere. Anything else is just speculation at this point.”

Will it pass?
The deciding factor in the debate will most likely be DF. In recent weeks, the party has for the most part kept out of the debate and has not given a firm answer as to how it will vote on the issue. But despite their opposing views, both Hansen and Jørgensen believe the party will come around and vote for the tax cut.

“Sadly, we expect the change to go through. The blue bloc party that has been against it has paved the way for it in return for changes to immigration laws. We still hope that DF will put their foot down and say no, but we fear that won’t happen,” Jørgensen says. M


By Elias Thorsson

Managing editor. @Eliasthorsson elias@murmur.dk

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