Last week the Løkke
Rasmussen administration presented a proposal for tax reforms called Job Reform Phase II. The measures are intended to provide tax
relief to various income groups and give greater incentives to work. They inevitably
provoked controversy about how much was necessary and who benefits most.
One of the basic issues
under debate on tax reform has been whether to reduce or abolish the high
marginal tax rate in order to prompt high earners to work more or to reduce the
rate on the lowest income group in order to bring more people into the labor
force. The Liberal Alliance party had made the former its cause and had been
virtually holding the government hostage with the demand. Leading economists
have also endorsed the position, saying it would be revenue-neutral. The Danish
People’s Party, the largest party supporting the administration, on the other
hand, has demanded tax relief for low-income workers. So who won?
Take-home pay
One of the key measures was
an adjustment of the employment deduction. People in the lowest income bracket
would get a new deduction of DKK 4,500 ($720). The rationale is that this would
make it more appealing for a segment of the population to work instead of
receive transfer payments. The government estimates that the measure would
reduce this segment from 50,000 to 21,000 people.
At the same time, the
ceiling on the employment deduction would be removed, and this would benefit
people in the highest tax bracket (with a marginal rate of 56%). There are
several other measures, most of which also seem to benefit high earners, such
as an acceleration of the increase in the threshold of the highest income
bracket, a reduction on the tax on car purchases (to 100%) and a more favorable
treatment of pension contributions.
Malleable statistics
In a simplified scheme, the
administration estimates the tax savings for four income groups. It emphasizes that the
lowest segment would receive the largest percentage reduction, 7.1%. The middle
segments would receive about 3.8%, and the highest segment 5.7%. The absolute
amounts, of course, paint a different picture. The lowest group gains about
$800 and the highest (represented by an income of about $165K) gains $4,300. So
the question is whether the administration is trying to sneak a tax break for the
rich into the package without actually changing the marginal tax rate. And the
real question is whether doing so is good or bad.
Other organizations calculate
the effects differently, of course. The Economic Council of the Labour Movement estimates that the top ten percent would receive an additional
$1,900 in disposable income and the lowest ten percent would receive $48, not
even taking into account supplementary factors such as the tax on cars. Such
estimates are always debatable. It’s difficult to make comparisons partly
because of a panoply of other taxes and duties, such as 25% VAT.
Gini out of the bottle
The criticism from the left is
that the measures would increase inequality. According to Cepos, the leading
conservative think-tank, the reforms would increase inequality more than any
other since 2001. They would raise the Gini coefficient by 0.46, from a level
of about 28.8. This has elicited many protests and denunciations not only from opposition
politicians but also from cultural figures. The actor Flemming Jensen, for
example, launched a broadside
on Facebook accusing the administration of betraying Denmark’s heritage of
solidarity and equality and promoting a neoliberal “law of the jungle” that is
creating a caste system while the number of homeless increases, hospitals are
forced to reduce costs and so on. In a subsequent interview, he concluded that
no one in Denmark needs an income of more than $160K: “Why the hell would we?” Imagine
how that would play in a country with heroes like Zuckerburg and Bezos.
The administration acknowledges the rise in equality and calls it insignificant. It argues that putting
more people to work and raising all disposable incomes inevitably increases
inequality but the level in Denmark would remain one of the lowest in the world (the Gini coefficient for the US, in comparison, is one of the highest,
at around 46-48). Finance Minister Kristian Jensen said that he has been to
town hall meetings around the country and no one has ever asked about the Gini
coefficient; they ask rather how the government will enable businesses to hire
more people. But they were probably his party’s own constituents. The Danish People’s
Party is against the abolition of the deduction ceiling.
The secret to happiness?
This debate goes to one of
the central issues of the research on comparative happiness internationally. The
happiest countries generally have very low inequality, but is equality the
direct cause of happiness, the most important single factor, or a derivative
effect of other factors? If it is a causal factor, is there a limit to its beneficial
effects? It is possible that, for historical, political and demographic reasons,
the socialist tendencies in Western Europe that have brought relative equality
and happiness in the prosperity since World War Two are no longer able to
sustain them in the current low-growth global economy.
But that’s a theoretical
question. The political reality is that the populations of social democracies are
split. The so-called “welfare coalition” of welfare recipients and civil
servants generally favors higher taxation and a larger public sector. Those in
the private sector would rather keep more of their gross earnings. There is a
constant tug-of-war and a tinkering with the tax tables whenever the governing
majority shifts between a center-left and center-right coalition. Although Denmark’s
economy is somewhat stagnant, it is fundamentally sound. The country has the
luxury of being able to take or leave the proposed reforms, which may have more
symbolic value than practical consequences. Perhaps sooner than we think,
robotics and AI will shift the debate on the labor market and inequality to how
to implement universal basic income.
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