COPENHAGEN (Reuters) – Opposition parties in Denmark are pushing for temporary cuts to one of the world’s highest tax regimes to ensure pandemic cash handouts boost consumption instead of ending up in state coffers.
Denmark rivals France among advanced economies for the heaviest tax burden on its citizens – who by and large accept it as the price to be paid for their cradle-to-grave welfare state.
But the downside of a system that taxes nearly 45% of gross domestic output is that much of the 60 billion Danish crowns ($9.1 billion) in cash handouts agreed as stimulus will go back to the state rather than being spent on goods and services to revive the economy.
“We need to get the wheels rolling,” Prime Minister Mette Frederiksen told parliament on Monday.
“We rarely ask Danes directly to spend money. I would like to do that today. If you can afford an extra night at a restaurant or a summer trip around the country – do it,” Frederiksen said.
But opposition parties and economists say Denmark’s top tax rate of 56% will encourage many in the top tax bracket to redirect money to pension schemes rather than spend it.
The cash payout would be financed by Danes’ own holiday allowance, which has been frozen as part of a revamp last year of the holiday pay system and was meant to be paid out as an additional pension when people retire.
A third of the 60 billion crowns would go to around 400,000 Danes in the top tax bracket.
“The behaviour of taxpayers, who pay the top tax rate, is paramount when it comes to how much stimulus the 60 billion will give,” said Mads Lundby Hansen, chief economist at liberal think tank CEPOS.
Denmark and France’s tax to GDP ratios of 44.86% and 46.09% respectively are far above the average among developed countries of 34.26%, according to the latest OECD data. Denmark also charges a 25% value-added tax on most goods and services.
Frederiksen’s Social Democrats won last year’s election by pledging to increase public spending and make businesses and the wealthy pay more towards welfare services through higher taxes.
But the cash handout, due to reach citizens later this year, has become a thorny issue for the Social Democrats as it would also push another 100,000 tax payers into the top tax bracket, including senior nurses and teachers – just as the economy is set to tip into recession due to the pandemic.
Opposition parties have instead suggested temporarily raising the top tax rate bar or applying a uniform tax on the one-off cash handout. The issue is currently being negotiated in parliament.
(Reporting by Nikolaj Skydsgaard; Editing by Jacob Gronholt-Pedersen and Susan Fenton)