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High Taxes in Hard Times: How Denmark Built and Maintained a Huge Income Tax

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  • Ganghof, Steffen

Abstract

Denmark is a welfare state whose income tax burden is larger than the total tax burden of the United States or Japan. Given recent political science accounts of the links between tax mixes and the welfare state, Denmark seems to be a puzzling anomaly. These accounts see income taxation as inherently problematic and claim that 'regressive taxes' (social security contributions and indirect consumption) have been conducive to building and maintaining large tax/welfare states. This article provides a simple explanation of the ?Danish puzzle? and challenges the argument about tax mixes. What is problematic about income taxation is capital income taxation, but low income taxes are only one of two ways to keep the capital income tax burden moderate. The other is to differentiate the tax burdens for capital and labor within the income tax. The article also explores the politics of income tax differentiation and suggests that Denmark's high level of income taxation made it easier to maintain and even increase this level in the 1980s and 1990s.

Suggested Citation

  • Ganghof, Steffen, 2005. "High Taxes in Hard Times: How Denmark Built and Maintained a Huge Income Tax," MPIfG Discussion Paper 05/5, Max Planck Institute for the Study of Societies.
    • Handle: RePEc:zbw:mpifgd:055
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    1. Søren Bo Nielsen & Niels Kleis Frederiksen & David Dreyer Lassen, 1999. "Would the Flat Tax Fall Flat in Denmark?," Palgrave Macmillan Books, in: Torben M Andersen & Svend E Hougaard Jensen & Ole Risager (ed.), Macroeconomic Perspectives on the Danish Economy, chapter 4, pages 106-133, Palgrave Macmillan.
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    7. Kåre Petter Hagen & Erik Norrman & Peter Birch Sørensen, 1998. "Financing the Nordic Welfare States in an Integrating Europe," Palgrave Macmillan Books, in: Peter Birch Sørensen (ed.), Tax Policy in the Nordic Countries, chapter 4, pages 138-203, Palgrave Macmillan.
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    Cited by:

    1. Sebastian Dellepiane-Avellaneda & Niamh Hardiman, 2015. "Paying for the Welfare State in the European Periphery," Working Papers 201520, Geary Institute, University College Dublin.
    2. Niamh Hardiman & Patrick Murphy & Orlaith Burke, 2008. "Legitimating Fiscal Stabilization: Ireland in Comparative Perspective," Working Papers 200813, Geary Institute, University College Dublin.
    3. Bogedan, Claudia, 2006. "Readjusting the social democratic welfare state in Denmark 1973 - 2003," TranState Working Papers 40, University of Bremen, Collaborative Research Center 597: Transformations of the State.

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