Michael de Laine

Tax reform proposals will cut tax on earned income, raise green taxes and cut tax deduction for interest

By Michael de Laine, Copenhagen, 2nd February 2009

Tax reform proposals launched today will cut tax on earned income and reduce greenhouse gas emissions, energy consumption and nitrogen pollution. According to the proposals, which are expected to create 24,000 jobs, the tax cuts will be paid for through a lower tax deduction for interest on loans and higher green taxes.

Almost 40% of full-time employees will see over 20% more from working a little more compared to day, while people paying intermediate and top tax rates, with an income just above the top tax rate threshold, will benefit by as much as 55%, according to proposals to reform the tax system in Denmark.

Under the leadership of former minister of taxation Carsten Koch, the tax commission said Denmark faces a number of large challenges, not just now with the global financial crisis, but also over the next ten to twenty years.

“The purpose of a tax reform is first and foremost to contribute to solving the long-term challenges by ensuring that the resources are used better than today,” the commission said. “In this way, a good tax reform can strengthen both growth and prosperity and improve the basis for financing the public sector’s services in the future.”

There has been a lack of labour in recent years in Denmark, the tax commission noted. This has resulted in pressure on the competitive abilities of private businesses, while some of the public sector’s tasks have not been carried out. The demographic and other developments over the coming decades mean that the volume of labour and employment will fall to a considerably lower level.

“This is a challenge that it would be irresponsible to ignore or minimise, even at a time when Denmark is greatly affected by the financial unrest and unemployment looks like it will rise,” the commission said. “If reforms are not implemented, the consequences will be low growth in incomes in Denmark over the medium term and growing problems with financing the public sector’s services and thus a need for cut-backs in the public sector or even higher taxes.”

In the coming decades, the lack of qualified labour, limited growth possibilities and pressure on the financing of public sector services will be the major overall challenges, the commission added. “This is something that has to be managed while Denmark must reach a number of very ambitious targets in its climate and energy policy,” it noted.

According to the tax commission, the long-term challenges facing Denmark are:

• A smaller labour force and fewer hours worked limit economic growth and prosperity
• Demographic development puts pressure on the public finances in terms of both revenues and expenses
• Increasing demands on the population’s competences
• Increasing globalisation raises the competition for capital and labour
• Ambitious climate and energy policy targets make demands on efficient means to reach them

A tax reform can be a part of the solution for all five areas, the tax commission said. “There are good possibilities of making the tax system more appropriate so the negative effects - or distortion - that the tax system results in are reduced,” it added.

The tax commission proposes tax reductions amounting to 35 billion kroner:

• 12 billion kroner in lower top and intermediate taxes
• 20 billion kroner in a lower basic tax and a higher basic deduction for people in work
• 3 billion kroner in a new ‘green cheque’ and a higher personal allowance as compensation for new green taxes

The commission said its tax reform proposals are fully financed without taking into account the dynamic impact of the cuts on taxpayer behaviour. The commission sees revenues of:

• 8 billion kroner from green taxes, sales of CO2 quotas, etc.
• 7 billion kroner from fewer special allowances and support schemes for businesses
• 20 billion kroner from a broader taxation basis including a lower tax-related value for deductions and fewer tax-favour fringe benefits

The tax commission says the reform will reduce distortions in the tax system and make it more robust, while a number of concrete objectives will be reached through positive impact on tax-payers’ behaviour:

• The total number of jobs will be increased by about 24,000 full-time positions
• The country’s total wealth will be increased by 30-40 billion kroner
• Greenhouse gas emissions will be reduced by 1.9 million tons, energy consumption will fall by 1.3% and nitrogen leaching in farming will be reduced by 30 million kilos
• Public finances will be strengthened by about 7 billion kroner, which can be used to meet about half of the long-term budgetary and fiscal challenges, for further tax reductions or for other purposes

The commission says these objectives will be reached in particular because the tax reform will make it more attractive to make an extra effort:

• For almost 40% of full-time employees, the gain from working a little more will be raised by more than 20%. For people paying intermediate and top tax rates, with an income just above the top tax rate threshold, the gain will rise by 55%.
• The number of people with a small gain (less than 1,000 kroner a month) from working, rather than receiving transfer incomes, will fall by 6%
• Highly educated specialists in the public and private sectors will receive the same incentives to make an extra effort as their highly educated peers in other European countries

Concrete proposals:ediate tax rate, currently 6%, will be abolished

The threshold for the top tax rate will be raised by 36,000 kroner to 388,000 kroner (or to 422,000 kroner before the labour market contribution is calculated); the top tax rate will be cut to 13.5 % from 15%. This means that the tax rate ceiling will be cut to 50%, excluding the labour market contribution and church tax.

The bottom tax rate (5.26% in 2010) will be cut by 1.5%, but the 8% health contribution will be included; the combined rate will be 11.76%.

The labour market allowance will be set up to 7% from 4.25%, but with a maximum of 22,300 kroner compared with 13,600 kroner.

The adult personal allowance will be raised by 1,000 kroner to 43,900 kroner.

There will be a new “green cheque” of 700 kroner to compensate for higher ‘green taxes’.

Because the bottom tax rate falls to 25.5% from 35.5%, the value of deductible interest payments falls by the same percentage - but first from 2012.

The ‘green taxes’ will rise and car taxation will be changed to motivate owners towards environmentally friendly behaviour.

A number of other taxes, duties and allowances will be changed.

Middle-income will benefit less from the proposed tax reform than others, and people in rented accommodation will benefit more than their same-earning counterparts living in owned property.

A single parent earning 350,000 kroner [the median of all full-time employees] and living with one child in rented accommodation will have 7,140 kroner more at his or her disposal after the proposed tax reform, the tax commission said.

A couple with two children living in rented accommodation, and a total income of 600,000 kroner, will have 6,870 kroner more at their disposal than currently.

A couple with two children living in owned property, and a total income of 600,000 kroner, will have 120 kroner more at their disposal than currently.

A couple with two children living in owned property, and a total income of 700,000 kroner, will have 620 kroner more at their disposal than currently.

A couple with two children living in owned property, and a total income of 800,000 kroner, will have 7,260 kroner more at their disposal than currently.

A couple with two children living in owned property, and a total income of 1,100,000 kroner, will have 36,940 kroner more at their disposal than currently.