DANISH ECONOMY

1) Excluding ships and aircraft
Source: Economic Survey December 2008, Ministry of Finance

Government set to lower income tax

By chief economist Steen Bocian, Danske Bank

Photo: Scanpix

Most people agree that Denmark has a problem with its marginal tax rate. Large sections of the nation’s workforce pay over 63 per cent in tax if their income rises, so for many there is no strong incentive to increase it. If you are asked to stay on an extra hour at work, you have to be fond of your job to say yes – because you don’t get much extra money out of it.

That gives Denmark a whole range of problems. Large groups are working less than they otherwise would. The gain from taking further education is small, after tax. It is tempting for the most capable people to leave the country, and not very tempting for foreigners to come here. Companies that want to employ highly qualified staff have to pay an extra-high salary in Denmark to compensate for the tax.

Not that money is the only reason to work and advance yourself – far from it. But it is one of the reasons, and if you ease the tax on the last earned krone, there is no doubt that it pulls in the right direction. It doesn’t take that much of a change in the working outlook of that many people, to make a difference to the big picture. Furthermore, the loss to the state of lowering the top tax rate is not so great because the top tax rate doesn’t rake in particularly large amounts of money. The vast majority of top tax rate payers pay only a small sum, but are nonetheless affected by the threat of paying a lot if their incomes increase.

It is gratifying therefore – and about time – that the government has now decided a noticeable lowering of marginal tax rate. The highest marginal tax rate will drop from just over 63 per cent to about 55 per cent, and the threshold for the top tax rate is to be increased to DKK 400,000 (EUR 53,688). It means that 70 per cent of full-time employees “only” have a marginal tax rate of just under 44 per cent. We thus still have a very significant marginal tax rate for both high and low incomes, but the improvement can be seen.

To finance the tax relief, the right to deduct interest costs will be cut, green taxes will be increased and the taxation
of companies will be raised by removing special schemes in the Danish tax system. So it is not a gift shop – but the tax reform is however strongly underfinanced for the first few years – which means that the tax reform will help stimulate economic activity – at a time when the economy is in very bad shape. In 2008, GDP decreased by 1.3 per cent and as it is looks right now, there is likely to be a fall in GDP of 2.5-3 per cent during 2009.

In addition to stimulating growth, there is no doubt that the government’s decision will be an overall benefit for the vast majority of the population, because it gives us a significantly more sensible tax system. Regardless of whether individuals get direct tax easing or not, it benefits everybody that the economy gets a boost when it pays to make an extra effort.