A note on taxation in Denmark

I’ve seen the idea of implementing a VAT in the US discussed quite a few places in the blogosphere lately, ie. here. I’m sure it’s a subject that will come up again, so here are a few remarks that might be of interest when it comes to the current Danish tax system.

First follow this link, read all of it, it’s not long. It’s an overview of the Danish income tax system; I could have copied it here, but it’s all there at the link anyway. It doesn’t include everything of course, on top of that Denmark has a VAT of 25 % which isn’t mentioned at the link – you can read more about that here – as well as a lot of fees and levies. The government gets a lot of money from us every year.

It also spends a lot of money. The government debt is actually growing, per capita government debt grew from 35.000 kroners to 55.000 kroners in 2009, a more than 50 % increase (link – in Danish). If you look at the percentage of GDP, government debt grew from ~11 pct. of GDP in 2008 to 18 pct. of GDP in 2009. The Danish National Bank has estimated that this years budget deficit will be 100 billion kroners, which means that per capita government debt will grow to 80.000 kroners by January 2011. That is a total government debt of 437,5 billion kroners – compared to a debt of 195 billion kroners in 2008; the government will more than double its debt in the years of 2009-2010.

Point is, when you add a new income source to the government, the government will find a way to spend the money. New taxes don’t mean lower budget deficits in the future, they just mean higher government expenditures in the future. Denmark is the country in the world with the highest taxes, and our government is still running a budget deficit of 5-6 % of GDP (the government’s own estimate is 4,9 % of GDP for 2010, but its estimate of the debt accumulation is, as is to be expected, somewhat lower than that of the Danish National Bank). Also, the long run fiscal outlook does not look good either – the problem is not limited to current business cycle developments; despite the current very high level of government income, current spending just isn’t sustainable in the long run, even if our relatively low debt to GDP-ratio gives the government some extra years to let everything turn to crap before reforms will be implemented.

I’d like to elaborate a little on that last point. Right now, a newborn Dane will on average, given current policy, cost the government 900.000 kroners (NPV) during his/her lifetime (no, the numbers are not the same for the two genders as females are on average more costly than males, but I’ll let that one slide for now). The DREAM-group (Danish Rational Economic Agents Model) has calculated that the 2006 structural (non-business cycle related) primary public budget surplus of 3,8 percent of GDP will turn into a 3,6 percent deficit by 2040.

Sort arbejde

Lidt data fra Rockwoolfonden jeg faldt over, da jeg skrev en kommentar ovre på econlog, er tilgængelig her:

http://www.srf.dk/lm2007/CL.ppt

Hvis man finder emnet interessant, og man kender lidt til matematik og modeller, er Eichhorns paper fra Public Choice Society’s møde i 2005 nok værd at se nærmere på. Konklusionen alene burde være nok til at fange manges interesse: Niveauet af skatteundragelse påvirker ikke vækstraten ['hvis antagelserne holder og alt det der', det er et teoretisk paper, men stadig...].

Flat tax: A review of the Russian experience

Mark Perry points me to an interesting paper. Perry’s graph, the one below, is not in the original paper, but I think perhaps it should have been ( ) – it is a graphical representation of a subset of the information contained in table #1 from the appendix:

From the conclusion:

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting.

According to the authors the by far greatest effect of the flat tax is that of increased compliance, the contribution from ie. effects on the labor supply are much smaller. Naturally, both the compliance- and labour supply effects are higher for high income groups, that is the groups where the resulting tax savings from the -reform are high.

The standard economic argument in favour of lower taxes is that taxes are distortionary (remember that it is important which questions you ask here) and that lower taxes means increased efficiency. It’s worth noting that what this paper implies is that even if taxes are not all that distortionary – it’s still a good idea to lover the taxes.

If Kristian Jensen really wanted to lower the amount of undeclared work taking place in Denmark, he should seriously considering a tax reform. I know we just had one, but it didn’t solve any of the major problems – how could it anyway, it was never meant to do that (what the reform was meant to do, in case you were in doubt, was to secure Fogh four more years in office). Even if the effects on the labour supply from a -reform would turn out to be quite low, there might still, judging from this study, be significant compliance effects that would lower the costs of the reform (if it did not turn out to finance itself altogether; under the current tax regime some reforms, flat tax or not, undoubtedly would if they were to lower the top marginal rates).

A few good sentences

1. From free-exchange:

Becoming an economist while denying the benefits, and beauty, of the overwhelming majority of markets that works, seems rather like becoming a physicist while refusing to believe in gravity.

2. Greg Mankiw on taxes:

[...] for the richest Americans — those in the top 0.01 percent of the distribution — the percentage of income derived from capital fell to 25 percent in 2004 from 70 percent in 1929.

If your image of the typical rich person is someone who collects interest and dividend checks and spends long afternoons relaxing on his yacht, you are decades out of date. The leisure class has been replaced by the working rich.

3. This one (from the comments) made me smile:

Q:Why do universities like mathematicians?
A:Because they’re cheap. They only need pencils, paper and a waste paper basket.

Q:Why do they like sociologists even more?
A: Because they don’t need the waste paper basket.