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

Steffen Ganghof

No 05/5, MPIfG Discussion Paper from Max Planck Institute for the Study of Societies

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.

Date: 2005
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