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Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
Mitigating the influence of the danish tax system on free society
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Mitigating the influence of the danish tax system on free society

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Investigation in to mitigating the influence of the danish tax system on free society

Investigation in to mitigating the influence of the danish tax system on free society

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  • 1. INEP WORKING PAPER MITIGATING THE INFLUENCE OF THE DANISH TAX SYSTEM ON FREE SOCIETYCONTENTS1. ABSTRACT ................................................................................................................................. 21. INTRODUCTION ........................................................................................................................ 32. ACTION ....................................................................................................................................... 93. CONCLUSION & DISCUSSION .............................................................................................. 154. FURTHER ANALYSIS AND ELABORATION ...................................................................... 20 Ulrik Rasmussen Institute for Normative Economic Perspectives Working Paper No. 14 JAN2011 urasmussen.inep@gmail.com Page 1
  • 2. INEP WORKING PAPER 1. ABSTRACT “The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self- protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant” Chapter I, paragraph 9, Mill, John Stuart. On Liberty. London: Longman, Roberts & Green, 1869;The area of investigation is the progression of income taxes in Denmark in the last 100 years, analyzed withan assumption of a desired sate of society as dominated be the highest degree of freedom possible.Danish taxes are set in perspective by comparative analysis with other European countries. It is shown thattaxes in Denmark together with other Scandinavian countries are in a league of its own.It is shown that taxes have not always been on the significantly high level they are at today. In thewellfunctioning society of growth and prosperity in the 1950’s and 1960’s taxes were at much lower levels.Through a reworking of the National Economic Accounts from the Danish Department of Finance theGovernment Current Receipts and Expenditures are analyzed.Through detailed analysis of the National Economic Accounts it is shown that total direct and indirect taxescan be cut by almost half through cutting costs in government expenditures on non-central activities, andthereby maintaining government funding at current level of health care, education, police, judicial system,roads/infrastructure, military etc.In addition tax-funding of income transfer is reduced, so that every personal welfare benefit by incometransfer is set at a level just above the limit for relative poverty defined by “The Institute for the SociallyExposed Groups”.The paper is concluded by a discussion of the impacts on society by introducing the proposed system asmeans to move towards a more free society in Denmark. Page 2
  • 3. INEP WORKING PAPER 1. INTRODUCTION “And it ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.” Page 24, Machiavelli, Niccolo. The Prince, translated by N.H. Thomson. The Harvard Classics. New York: P.F. Collier & Son, 1909Taxes have in the last 100 years increased significantly. The marginal taxes are so high – above 50% - thatsociety forces the individual to deliver more to society than he can keep for private expenditure.Notoriously politicians in Denmark are afraid to act and cut taxes to a rational lower level. The foremostproblem being that more than half the eligible voters are living off the taxes that the minority contributes. Aslong as this situation is in place, who can with any conviction believe that the majority of beneficiaries willintroduce a system that will cut their alms of welfare aid from the minority of tax benefactors.As long as those who receive are more plentiful than those who contribute the situation can only develop inone direction – towards higher taxes.This small essay is contrived in the hope that the productive minority will be enlightened and more vigorouslyoppose those who by means of taxation are in effect taking decisions on their behalf and controlling theapplication of their efforts and energy; and demand fairness and a general limitation of the execution of thestates monopoly on legitimate violence with which it upholds the collection of taxes by force.The methodology applied here is that it is assumed that the general public goods other than the personalwelfare subsidies of transfer income are to be maintained – i.e. public schools, public hospitals/medical care,police force, military forces, judicial system, roads/infrastructure etc.Even though these public goods can be questioned from a liberty point of view a first step will be to think upa way to cut taxes with these public services in place, as these are the applied arguments from both ends ofthe political scale in Denmark and in fact in many European societies.In Denmark the collectivist or socialist framework of thought is prevalent, and this short essay will likely fallbeyond what is seen as reasonable economic policy from a political point of view.However to counter the socialistic paradigm of Danish society today it is imperative that alternatives aredebated and the order of things confronted.In the following another way is shown.In the graph below the perpendicular development of personal income tax in Denmark can be seen. Page 3
  • 4. INEP WORKING PAPER 60 INCOME TAX IN PERCENT OF TAXABLE INCOME - 50 DENMARK 1903 TO 2006 40 30 20 10 0 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005Figure 1 - Source: Rockwool Fonden (Technical note 8 + Nyhedsbrev ISSN 1396-1217) & Statistical 10 year overview from Danmarks StatistikIt may be noted in figure 1 that in the first 50 years of the period taxes rise by about 10 percentage points,whereas the taxes rise by more than 30% in the last 50 years. So taxes are not only increasing they areincreasing a whole lot faster.Also taxes can be seen to move forward with a steep incline from end 1960’s to start 1970’s. Page 4
  • 5. INEP WORKING PAPERIn the table below a comparison of taxes in 25 european countries can be seen. Total tax in percent of BNP 1995 1997 1999 2001 2003 2004 Sweden 49,1 52,1 53,4 51,5 50,3 50,6 Denmark 49,1 49,1 50,3 48,6 48,1 49,2 Belgium 43,9 44,9 45,5 45,3 44,9 45,3 Finland 46,0 46,5 46,7 45,8 44,8 44,5 France 42,7 44,1 44,9 43,8 43,1 43,4 Austria 41,4 44,2 43,8 44,8 43,1 42,7 Italy 41,2 44,7 43,3 42,5 42,7 41,8 Luxembourg 42,4 41,7 40,6 40,6 41,0 40,1 Slovenia 40,2 37,9 39,1 38,8 39,4 39,7 Hungary 41,6 39,0 39,1 39,9 39,0 39,1 Germany 40,2 41,1 42,1 40,4 40,0 39,0 Netherlands 40,5 40,6 41,6 38,3 37,5 37,8 UK 36,0 36,1 37,4 37,8 36,4 37,1 Tjec republic 36,2 35,5 34,7 34,6 36,1 36,6 Greece 32,6 34,3 37,3 36,9 36,7 35,3 Malta 30,0 30,2 27,6 31,1 33,0 35,1 Portugal 31,9 32,9 34,1 34,0 35,3 34,6 Spain 32,7 33,2 33,6 33,5 34,0 34,6 Poland 39,4 37,6 37,2 34,7 34,4 34,3 Cypress 26,9 26,0 28,5 31,5 33,2 33,9 Estonia 37,9 35,9 34,6 31,7 32,9 32,6 Slovakia 40,5 35,8 34,6 32,8 31,3 30,4 Ireland 33,1 32,3 31,7 29,7 29,0 30,2 Latvia 33,6 32,7 32,3 28,8 28,8 28,9 Lithuania 28,6 29,8 32,1 28,7 28,2 28,4 EU25 40,0 41,0 41,4 40,4 39,9 39,8 EU15 40,1 41,1 41,6 40,7 40,1 40,0 Source: Eurostat.Figure 2 – Source EurostatWhat this shows can be seen as a en expression of a set of possible states. What then is needed to movefrom the top of the table to the bottom. This is analyzed in the following.When looking at a reduction of public tax revenue of 45% in Denmark, this would bring about a reduction intaxes in percent of BNP to a level of: 50% of BNP * ( 1 – 45% ) = 28%So this would in fact bring Denmark from the top to the bottom of the above table. According to the RahnCurve theory the public spending would still be too high to be optimal in relation to economic stimulation.However as it is shown in the following it is not possible in a straightforward manner to cut tax revenue morethan this without either cutting personal welfare benefits below the defined poverty limit or to decrease corewelfare functions such as education, health care, police etc.Over and above this, the level of 28% can from figure 1 be observed to have worked well in the not sodistant future. In 1967 the same level of tax pressure was applied, and people who remember 1967 mightnot even see the difference between society today and back in 1967; in terms of welfare that is. Page 5
  • 6. INEP WORKING PAPERWhen looking at the tax reforms of the bottom 5 countries in the above statistic it is striking to see that 4 outof 5 have reduced the tax burden significantly – even though these societies have had a marked increase instandards of living in the same period of time.As can be observed from figure 3 below, Denmark also holds the record for dissuading entrepreneurialendeavours by taxing the last earned DKK by as much as 59% in 2006.Figure 3 – Source : “Taxation trends in the European Union”, 2007 edition, ISBN 978-92-79-04865-4Solving the equation for lowering taxes should also address the above observation for heightening thewillingness to apply time and energy to increase your income marginally.It is stipulated here, that a well functioning and rational tax which stimulates economic growth in it self cannot be progressive. By what rational principle can you use a discriminatory pricing principle on tax, butalmost everywhere else in society we forbid it. Discriminatory pricing is also not effective when you wantsupply to meet demand at a high quantity. The supply and demand curves are reversed then it comes totaxation and supply of labor.Progression of taxes are an old principle which was applied when the marginal tax was 2,5% of income andonly for those who earned 111 times more than an average carpenter. Page 6
  • 7. INEP WORKING PAPER Figure 3A – Source : Page 5, Skatteberegningsreglerne gennem 100 år, Hans Mølgaard Christensen. SR-SKAT 2003In this progressive tax system also the total tax-income to the government was under close scrutiny andthere was a direct link between the amount paid in taxes and the expenditure of the government – the fundswere earmarked so to speak, which can also be seen in the “over fair” tax collected in the times of war in1915-1917, where the tax was immediately decreased afterwards. The funds needed for the war collected bytaxes were immediately discontinued when the need no longer existed.So the intention behind the introduction of the progression and the foundation upon which it rested, no longerhave merit in the tax system of today.Also there has been a gradual increase in taxes over time until the beginning of the 1960’s. In essence thesignificant increase in public spending from 1960 to 1972 was what started the demise of a rational foundedtax collection scheme. From the government of Jens Otto Kragh to the government of Anker Jørgensen ledalmost all the way by the social democrats, the thought of individual freedom was set a side for a regime ofcollectivism and thus markedly increase in public spending.This conversion process from a society foremost based on reason and freedom to a society based onlegitimated planned goodness was not introduced gradually but rather introduced over a periode of 8-10years where the taxes were doubled.If that was possible the same period of normalization must be applicable going the other way to reducetaxes. So a suggestion is to cut taxes by introducing firstly a flat tax reducing total public tax income by only4%, and then reducing this flat tax by 4% each year until the suggested level is reached. This will equate thepace of the aforementioned increase, and the full effect proposed above will have been reached in the timeperiod.The foundation on which progressive taxes are based are flawed by the exact same problems that have ledto the general inefficient tax system in the first place – the majority live of the productivity of the minority withno right other than the right of the strong over the weak.Fighting this principle of the strong mastering the weak is otherwise a highly advocated doctrine bycollectivists and socialists, where they argue that the weak will not get help if they are left to the goodwill ofothers under a pure privately organized society. Page 7
  • 8. INEP WORKING PAPERThis however is not supported by any evidence, and in any respect it is debateable how much help the weakshould receive. According to the socialist humane view help enough is when everybody is equal not in libertyand freedom of actions but in monetary terms. This view is as feeble minded as not helping those how arewithout guilt in their misery. Rational contemplation as well as history in the the former communistic societiesshow that this assumed goal is not viable.As one last guideline for a reform of the tax system one can look at the statement: If one – as in Denmark – as a basis has a tax system with a high degree of progression, it will be difficult to change the tax system to a system of flat tax, without a marked decrease of the tax. Page 53, Skaτ, Februar 2008, Skatteministeriet, København 2008, Schultz A/S, ISBN: 87-90922-81-6, (Autors translation)The message is quite clear – if you want a simple flat tax system, when your current system is of a complexprogressive nature, then the taxes must be cut hard. Page 8
  • 9. INEP WORKING PAPER 2. ACTION “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man." Shaw, Bernard. Man and Superman. Cambridge, Mass.: The University Press, 1903An examination is presented in the following of a solution to facilitate a more rationalistic founded tax systemin Denmark, in which the individual is given the right to decide what he wants to spend his productive forceson.Rectifying the welfare state does not from outset mean a cut in taxes. What it means is a cut in social welfareexpenses, which then bring about the lower taxes. I.e. the lower taxes are a twofold measure, where bothfreedom is heightened and the welfare-claim-mentality is challenged.Taxes are lowered to the level of the so called “labor market contribution” tax (a socialistic invention whereyou apparently pay tax to have a job, and not simply on your income – an invention originally introduced tomake the direct tax on income appear to be less high).I.e. the tax system now in place with its progression, tax deductions and different tax categories, is replacedby a flat tax of 8%. No more no less.It should be fixed so that 8% is not tampered with to go on the socialistic slippery slope which will maketaxes increase rapidly again. The old idea of pledging this in the constitution seems to have been ineffective,but at least a return to this practice will result in a more secure jurisprudent position than today.When taxes are formed as a simple percent of income tax revenue will rise and fall as the economicconditions do, and so should the welfare or rather the public activities still in place.How this is effectuated and what it means in terms of cutting costs is explained in figure 4.What this new tax regime will buy is all variants of schools currently funded, military, institutes of justice inevery form of the judicial system of today, police forces, parliament costs, health care at present level,universities research, public offices at present level and social welfare subsidies at an amount of 60.000DKK for each person regardless of his predicament. I.e. 5.000 DKK per month for each person who does notwork – retired or not.This one amount regime will firstly encourage everyone to work who can, and secondly it will treat all citizensequal.The 60.000 DKK is a little bit higher than the current state pension and the state educational subsidies, but inthis new regime, for a regime any coerced tax collection is, there will be no side benefits, such as peopleeligible for additional state pension, single persons will not get double state pension as at present and therewill be no housing aids.The idea is to increase the non-tax limit, which today is around 40K a year. This should be increased toreflect the new minimum of existence of 60K per year. Again an old principle reapplied: “…an the personal non-taxed amount, which originally was intended as a tax-exemption for an income which would be equal to what was needed to uphold what was seen as a minimum of existence.” Page 3, Skatteberegningsreglerne gennem 100 år, Hans Mølgaard Christensen. SR-SKAT 2003 (Autors translation)This could be followed by a cut, so that everyone upholding at least an income of 60.000 DKK without statesubsidy will not get anything. Today nearly everyone above 65 years of age is getting welfare subsidies. Thepositive cash impact on lower taxes from cut back in administration of these rules of additional funds, privatecapital monitoring etc. is not calculated into this new tax scheme, so taxes might be even lower thansuggested from these cuts. Page 9
  • 10. INEP WORKING PAPERNaturally there will be a scale problem on the edge in such an abrupt distinction between receiving apersonal welfare benefit and not receiving, btu the implications will be minimal, as the income is so low andunattractive and punishment for fraud should be set at accordingly high levels.Everyone will have to live of this common welfare subsidy or rely on funds they have themselves. So the firstobject that comes to mind will be; there is no way anybody can live on so low a subsidy. To this argument itmust be countered, that students today are actually living on this level of income. Also the “institute for thesocially exposed groups” have been so good as to indicate that a discount budget is 3900 DKK per month.Then this leaves 1100 DKK per month for housing. Again it may be argued that there is no way anybody canfind accommodation for this amount. But again student do live somewhere today, and it is possible to findflats at this rate. It will not be much more than a roof over your head, but it exists, and generally the supplywill adapt it self to this new situation, so that the amount of accommodations on this level will increase.Another study setting up a budget from the organization CASA gives a minimum of 4.984 DKK in 2004 for apersons income (Hansen, F.K. & H. Hansen (2004). ”At eksistere eller at leve. Fattigdom og laveindkomster i Danmark – hvordan måler man fattigdom?” . CASA.). This is even for a single woman with 1child, so that limit might even reasonably be reduced. So 5000 DKK per person is not a particularly low levelfor providing a minimum income for living. In the CASA-budget It is a budget which does not include housing,but there are amounts set aside for items like communication, media, exercise, other recreational activitiesand such amounting to approximately 2000 DKK per month – an amount plenty for finding accommodation.When a society needs to frame the limits of poverty by “relative poverty” i.e. to say that you are poor infinancial terms when you do not have a certain percentage of the average or median income, this is anindication of too high taxes and the fact that the humanitarian views have been taken too far. If you have tocoerce other people to give you financial means so that you can live, then a fair amount should be a fixedamount that will provide you with food and a roof over your head – nothing more. If you are sick this makes adifference as you are not to blame for your predicament – what is advocated here is a return to what hasbeen coined in Denmark as the difference between the “worthy in need” and the “unworthy in need”. Aprinciple by which you should expend you energy and time for at least 37 hours a week in return for yourpersonal welfare benefit, when you are “unworthy in need” because you are capable of employment and youas an individual have had the responsibility for securing your position against the downfall which you areexperiencing.In figure 4 below it may be observed how the public financial statement in the solution compares to theexisting public revenue and cost.Service expenditures are cut to about half of the level today and personal welfare subsidies or incometransfers are cut a little less than that.In total revenue is cut a little more than expenditure by about 5000 million DKK. This deficit may be financedby the known effect from a higher tax revenue when lowering taxes, because citizens who have beentampering and optimizing their tax returns will start paying the tax they should and generally people will tendto spend more when they have more liquidity. I.e. the postulate is that Denmark today finds it self far to theright on the Laffer curve.Some indications can be found in the analysis by CBO (the Congressional Budget Office), DECEMBER 1,2005 “Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates”.Here the estimate is a recouperation of 20% of the lost revenue in a 10 year period. I.e. 300b times 20% is60 billion DKK, and we only need 5 or perhaps 15 for the sake of paying of the loans by 10 billion DKK peryear created by the irresponsible politics of the past. So the estimated effect of 20% recuperation of lostrevenue – i.e. it is not postulated that the revenue will increase, only that it will not diminish by the factor thatit is cut – is not even necessary. Only a recuperation as low as 5% is necessary. Page 10
  • 11. INEP WORKING PAPERA supporting evidence of the CBO’s analysis is the experience of the Russian Governement in the tax reformof 2001: “The year after the reform the revenue from income tax increased by 26% with eliminated inflation. As a percentage of BNP the revenue of personal income increased by almost 20%.” Page 43, Skaτ, Februar 2008, Skatteministeriet, København 2008, Schultz A/S, ISBN: 87-90922-81-6, (Autors translation)When discussing this afterwards it is pointed out that this has not been shown directly to be an effect ofincreased activity in society but rather among other factor because of a higher compliance from tax payers,i.e. people actually pay their taxes after the reform, whereas before they did not. However that is of littlerelevance here, as the point is that the revenue increases, for what reason is irrelevant for the purposediscussed here.Another theoretical analysis from Danish data, which supports that the tax cut will finance it self by more than5% is “Skattereformer: Dynamiske effecter og fordelingskonsekvenser, Anders Frederiksen og Jan V.Hansen, Det Økonmiske Råd, Arbejdspapir 2002:1”. In this paper the average finance factor is about 20%,and this is from very moderate tax cuts compared to the scheme proposed here.Moreover it can be observed that the complex and very meticulous rules of taxation is a burden on society ingeneral. From page 19, Skaτ, Februar 2008, Skatteministeriet, København 2008, Schultz A/S, ISBN: 87-90922-81-6, it can be observed that tax rules required, calculated through the AMVAB-method, a total effortworth of 9100 mio. DKK, or twice as much as the non-funded part in the above.As the rules of taxation becomes much less complicated these rule-compliance-costs will diminish – if this isestimated at half, which is in logic terms a conservative estimate, as 40-50 rules are taken out and replacewith a handful, then this alone will finance the gap identified above. Page 11
  • 12. INEP WORKING PAPER The public expenditure Solution Existing Saving % Year 2003 - 2005 prices Service expenditures 224.011 415.447 (200.757) -48% Personal subsidies 153.227 248.489 (95.262) -38% Total expenditure 377.238 663.936 (296.019) -45% The public revenue Year 2003 - 2005 prices VAT 135.088 135.088 - 0% Other taxes on goods and services 69.269 69.269 - 0% Taxes on gasoline, roads and tobacco 31.175 31.175 - 0% Taxes on electricity, oil, CO2 etc. 23.813 23.813 - 0% Company taxes 40.270 40.270 - 0% Taxes on property 10.151 10.151 - 0% Labor Market Contribution Tax 62.282 62.282 - 0% Other personal income taxes - 301.577 (301.577) -100% Total revenue 372.047 673.624 (301.577) -45%Figure 4 – Source : Calculations founded in figure 4 and 5 which are in effect based on the budget review of the Government Department of Finance.I.e. 40-50 different small taxes are removed and income taxes are set at the level of the labor marketcontribution tax of 8% of the gross income.No complex tax deductions and complicated schemes. Every citizen will be able to calcultate and understandhis own taxes – unlike the system today, where even a certified accountant will be unsure about the rightcourse of action in doing his tax returns as documented in "Skaτ - April 2004, Strukturen på skatteområdet,Skatteministeriet, ISBN: 87-90922-50-6, københavn 2004" and "Redegørelse fra Skatteretsrådet, april 2001,ISBN: 87-90922-09-3, Notat om hvorvidt der lovgives for specifikt og for detaljeret på skatteområdet "So from figure 4 it can be ascertained that a rather high amount of public spending should be reduced toreach the goal of a tax revenue below 30% of BNP. In figure 5 and 6 it will be explained how this is carriedout. Page 12
  • 13. INEP WORKING PAPERIn figure 5 it is shown how the personal welfare subsidies are reduced.The numbers are reduced by percentages rather than by multiplying the number of recipients with the newcommon amount of welfare benefit. I.e. the reduction is conservative and might be reduced even further. Table B. Total public transfer payments distributed on main categories. Millions of DKK, 2005-prices 1999 2000 2001 2002 2003 REDUCTION Total personal subsidies (sum) 237.100 236.574 238.083 241.133 248.489 95.262 Total reduction Active welfare subsidies (sum) 31.668 31.992 32.461 32.469 31.346 Sum Active work market politics 7.875 7.777 7.191 6.772 5.236 2.618 Is cut by half - could be reduced more but some payment is assumed in the solution. Flex job scheme 902 1.344 2.004 3.047 4.135 2.068 Is cut by half - could be reduced more but some payment is assumed in the solution. Activation and revalidation 8.541 9.348 9.547 9.011 8.226 4.113 Halfed in the same way as the unemployment welfare benefit Orlov til uddannelse 1.925 1.025 550 12 0 Uddannelsesstøtte mv. [5] 12.426 12.498 13.170 13.627 13.749 1.375 Is cut by 10% - possible potential Passive welfare subsidies (sum) 48.743 48.828 48.849 50.515 56.225 Sum Unemployment welfare subsidies 20.582 20.102 19.222 19.361 23.327 15.551 Set to a third of the maximum - 5K per month - the rest rely on personal insurance Maternity leave etc. 7.608 7.588 7.368 7.676 8.630 5.753 Set to a third of the maximum - 5K per month - residual financed individually Personal welfare benefit, long term unemp. 11.276 11.238 11.462 11.887 11.937 4.178 35% saving according to calculation - set at the 5K per month level Benefit under sickness 9.277 9.900 10.798 11.591 12.331 Is not cut - possible extra potential Non working - welfare subsidies (sum) 132.474 131.063 131.555 132.112 134.476 Sum Housing welfare subsidies 7.988 7.718 7.635 7.683 7.747 7.747 Cut 100% Early retirement welfare subsidies 20.799 21.549 21.884 22.948 24.806 22.325 Cut to 10%, which will have to go to pre retirement etc. because of health. Retirement welfare subsidies 64.374 64.150 64.771 64.710 65.245 Left at the current level - possible potential from sanitation of complicated rules Pre retirement welfare subsidies 33.453 32.725 32.976 33.117 33.586 Left at the current level - possible potential from sanitation of complicated rules Old early retirement welfare subsidies 4.067 3.363 2.747 2.134 1.569 1.569 Cut as the early retirement welfare subsidies. Personal add on welfare subsidies 1.793 1.559 1.543 1.521 1.523 1.523 Cut 100% Extra benefits welfare subsidies (sum) 23.960 24.407 24.961 25.724 26.076 26.076 Cut 100% - one amount - that is it - no more complicated schemes. Housing welfare subsidies 2.270 2.206 2.226 2.307 2.486 Cut 100% Child support welfare subsidies 14.550 14.629 14.786 15.074 15.280 Cut 100% Erstatninger mv. [14] 1.041 1.183 1.145 1.102 1.034 Cut 100% Extra child support welfare subsidies 2.272 2.354 2.413 2.460 2.432 Cut 100% Handicapped welfare subsidies 3.031 3.245 3.578 3.941 4.007 Cut 100% Help in special occasions welfare subsidies 796 790 814 841 839 Cut 100% Diverse (sum) 255 284 256 313 366 366 Cut 100% Source: Department of Finance - expenditure database. Kilde: Finansministeriets Udgiftsdatabase.Figure 5 – source: Calculations and additions to the Danish Governments Department of Finance – expenditure database.As can be seen from figure 5 above the people most in need will not get cut by this scheme. Some singleretired citizens will get less, as they have today a double income in relation to citizens living together. So theprinciple of one person one amount is also carried through here.In general the group of retired citizens will not get less than today.In addition the level of welfare for persons really unable to work will not be changed, and there is consideredan amount for some of the lose schemes of “flex job” and other platforms grossly misused by privateenterprise today. I.e. these schemes will be cancelled and the persons who are really sick or unable to workwill be transferred to that category – the rest will get the one amount per person of the fixed 5000 DKK permonth and nothing more. The potential is in fact much higher as the majority of people on these schemes willlikely find regular employment instead of the existence minimum payment which the personal welfare benefitis reduced to. Page 13
  • 14. INEP WORKING PAPERIn figure 6 the reduction in service expenses is listed. Service expenses Million DKK, 2005-prices YEAR 2003 Law 11.082 Police, courts, administration of law and production of law Defence 21.225 Military, rescue operations and administration of these Healthcare 40.703 10% cut (artificial insemination etc.) includes: Education, hospitals, doctors. No administration. Each hospital for them selves. Distribution, development etc. has to be decided by local governement without paid administration. Those who take an interest decides. Education 64.540 Primary school, high schools, universities and other long term education. Traffic 20.569 Roads, trains, air traffic, waterbourn traffic. Could even be made private. Scientific research 10.095 Could be made private. Also ministerial control is eliminated. Each institution for it self. Welfare for the elderly and handicapped 41.226 Without day care and 24hour care and a 10% cut, which people can take care of them selves. Existing institutions could be rented out by the state to private enterprise. State administration 9.941 Tax office, foreing affairs office, finance office, parliament, the queen and home office - no foreign aid and no subsidies to Greenland. Savings on less administration (4.692) Proportional to the cut in public spending. Total 214.690 Total actual expenditure 2003 415.447 Total savings (200.757) -48% Source : Department of Finance - Budget Review Kilde: Finansministeriet - Budgetredegørelse 2005Figure 6 – source : Calculations and additions to the Danish Governments Department of Finance – Budget ReviewWhat is reduced is public subsidies for private companies, administration of the unemployment offices,subsidies for culture and sports, subsidies to third world countries, public funded daycare etc. Page 14
  • 15. INEP WORKING PAPER 3. CONCLUSION & DISCUSSIONIn this paper it has been analyzed how much the taxes has increase over time. In additionit has been set forth that cutting taxes markedly will be possible without discontinuing thehumane welfare benefits to the in reality weak groups of society, which are in realityunable to support themselves.A significant tax-cut of 4/5 will not bring about a disastrous change in society. For mostpeople it will bring about a minimal change.All the central welfare benefits which we normally agree on in broad terms will bemaintained – public schools, hospitals, infrastructure, military, police force, judicial systemetc.The real change comes from looking at the transfer of income from the productive to thenon-productive – and the transfer of income interrelated between members of theproductive group.This section of public undertaking has been growing rapidly over time, and no politicalparty or politician independently have had the fearlessness to bring this topic todiscussion.The fact that we will be able to keep all our central welfare institutions with a tax-cutbringing the taxes down to only 1/5th of todays level is a real epiphany.There are serious considerations to attend to though, when altering a system as radicallyas proposed here: 1. What will happen to the prices in society in general when the disposable income rises markedly for the general public? 2. Will it be possible for people who have children etc. to uphold their current living standards? 3. Would the unemployment rise sharply as a wide section of the public offices are shut down? 4. Can we be certain that a supply of cheap housing will develop to accommodate the less disposable income for the beneficiaries of welfare? 5. Would it not be favourable to introduce such a system gradually over time? 6. Is such a radical solution really necessary and prudent from a rational point of view?So to begin from the top, will prices rise, and everything else will adapt, so that the onlyresult is a redistribution of wealth from the poor to the rich. This is a complex question.There are no indications in the empirical evidence from larger tax cuts in the US, UK,Sweden and other places, which indicate that there will be an adverse effect on thegeneral level of prices or the economic conditions in general. What will happen will largelydepend on what the tax-paying citizens will do with the additional disposable income. Page 15
  • 16. INEP WORKING PAPERDifferent effects of tax cuts are discussed at length in “Will tax cuts ultimately pay forthemselves?” by Richard Kogan, Center on Budget and Policy Priorities, March 2003.In this paper it is shown that tax revenues grew less than normal in times of tax cuts. I.e.the revenue was not reduced, but grew less. I.e. the tax cuts do not pay for themselves,but if you reduce public spending there will be no direct adverse effect on the generaleconomy. Moreover even though a tax-cut will not pay entirely for itself there will be alarge positive self financing element.The article draws the same conclusion as the CBO study mentioned before “Analyzing theEconomic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates”. Tax cuts willbe self financing to some extent but not 100%, and the paper by Richard Kogan actuallyestimates indirectly a higher than 30% mitigation.Now to turn to point 2 – will it be possible for citizens who do not work and are not sick touphold their current standard of living. The answer is a simple one. No it will not bepossible. This is simply because their current level is too high in comparison to the peoplewho actually work and produce for society. So, no it is not fun to be unproductive, but atleast you can stay alive, which is actually only because of the goodhearted nature of yourfellow man.Question number 3 is hard to answer. The unemployment might rise momentarily, but asthere are no luxury alternative to work anymore the unemployment can be expected toreturn to the current level and likely also below. In the meantime people must rely on thosethey are connected to who actually do work – if they are decent people who are notdemanding assets which are not theirs to demand they will be able to get by without lossof property and the like in the transition period until they find employment. This adverseeffect of change will also be mitigated if the change is done gradually over time.The main driver which is lacking in the welfare state of today is the lowering of thepersonal welfare benefit amount to a level where it is below even the lowest paying jobs,so the incentive to work is high compared to a situation where the primarily state fundedcompensation for losing a job is almost at the level of the wage for the lowest paying jobs.This is illustrated in the analysis of flat tax in Denmark in the following paper: ”A flat income tax will not universally have a beneficiary effect on the supply of employees in a country with a large social security network and a high tax on income as in Denmark. Here an introduction of a flat tax will result in an increase in the average taxation of the lowest paid. This will mean that the reward for working versus receiveing personal welfare benefits are reduced, so that more citizens will be urged to be unemployed.” Page 34, Skaτ, Februar 2008, Skatteministeriet, København 2008, Schultz A/S, ISBN: 87-90922-81-6, (Autors translation)This is exactly right, but the reverse is true when the personal welfare benefit is reducedmore than the relative tax increase. In fact the taxes will under the proposed scheme alsoreduce in nominal value for the lowest paid in the country (it is only a relative tax increase,as the highest taxes are decreased more than the lowest) – so there will be no negativeside effects in this respect. The only way to have this double beneficiary effect is of course,as is done here, to lower taxes and to finance it with a decrease in the public personalwelfare benefits or income transfers. Page 16
  • 17. INEP WORKING PAPERThe increase in spending in the private sector will secure new employment for those whowas previously employed in the public sector – who will now under the new order of thingslose their job. All in all the functions of government which are truly valuable for people willnow flourish in the private sector. So whether the spending will increase or decrease is anopen question – what will happen is that the spending actually undertaken will be a freechoice of the citizens and not a planned funding of activities beyond the control of theindividual.So there are multiple factors influencing in opposite directions. There is no good reason toexpect that the unemployment will rise – more likely it will decrease as the uncertainty ofthe real world will make the previously public employees exert more effort in the hours theyget paid for.Will the tax cut create enough cheap housing for those who are unproductive and thus aresubsidized by the productive tax paying citizens. The standard of housing and the relatedprice levels are already available. And no it is not in the center of the capitol, with a lot ofactivities in short range of one’s living quarters, but it exists. Also there will be a wholedifferent housing market once the system of subsidized welfare add ons in relation tohousing is removed – this market will likely provide cheap housing also in the big cities.The fundamental idea is that society should, from assumption of a set of humanisticvalues, provide life support for each individual – but not more than the level required tosecure this. I.e. it is not a human right to have a home in a big city as long as you canmaintain your life, housing in the country side is assumed acceptable.Yes to question number 5. It will be favourable to introduce the proposed new systemgradually over time – the disadvantage is that it will not be possible to introduce it at all ifdone gradually. To get any change in the current system of sharing wealth according toneed and not according to contribution, one will need to swipe the sick tissue away by onefinal cut. At least the introduction should bring about real change, so if the implementationis done gradually, the first step should be significant enough to sustain the flowing smallersteps.In dealing with question number 6, it must be stated that nothing is necessary. Denmarkhas as a country been growing in GDP and GDP per capita over the last 30 years, asdepicted in figure 7.It may be that the growth would have been higher with a more rational tax system, but thequestion is not so much what we will gain in monetary terms, but what kind of life we asindividuals in our nation want to live, and who will make the decision for the individual. Page 17
  • 18. INEP WORKING PAPER Denmark - GDP in USD and Rank in the worldFigure 7 – source: World Development Indicators DatabaseLooking back at the thoughts that created the nation and which is our cultural heritage onecould draw on a quote from one of the earliest works in the written language: ”With law land shall be build, but would every man satisfy him self with what is his and let others enjoy the same right, then one should need no law. … The law should not be done or written to any particular mans advantage, but after the good of all, which resides in the country” The law of Jutland 1281This is a radical different idea from the creed in Denmark today, where “I am entitled to thiswelfare benefit” seems to be a part of everyday life.Another quote from our not so distant cultural heritage and from a forward thinking giant inhis time: “If the roads, the railways, the banks, the insurance offices, the great joint-stock companies, the universities, and the public charities, were all of them branches of the government; if, in addition, the municipal corporations and local boards, with all that now devolves on them, became departments of the central administration; if the employés of all these different enterprises were appointed and paid by the government, and looked to the government for every rise in life; not all the freedom of the press and popular constitution of the legislature would make this or any other country free otherwise than in name.” Chapter V, paragraph 20, Mill, John Stuart. On Liberty. London: Longman, Roberts & Green, 1869; Page 18
  • 19. INEP WORKING PAPERThe only part of what John Stuart Mill is here envisioning as a nightmare, which is differentin Denmark today, is the existence of a privately organized stock-market. All othercategories are in fact organized by the state and are as such part of “departments of thecentral administration” paid in effect by the government.We are as such converging towards (or am in fact already) what Friedrich von Hayek hasdescribed so well in his work “The Road to Serfdom”. "It was the prevalence of socialist views and not Prussianism that Germany had in common with Italy and Russia - and it was from the masses and not from the classes steeped in the Prussian tradition, and favored by it, that National Socialism arose." Introduction, p. 9, Hayek Friedrich, The Road to Serfdom, Routledge Press, March 1944 "The belief is becoming more and more widespread that, if things are to get done, the responsible authorities must be freed from the fetters of democratic procedure." Chapter 5, p. 67, Hayek Friedrich, The Road to Serfdom, Routledge Press, March 1944The mentality of Danish society today compared with these two quotes could beinterpreted in Hayek’s way as the fact that the totalitarian socialistic and fascistic state isnot so far away from Denmark’s “well organized” welfare state.Today in Denmark each citizen is only 2/3th of living in serfdom - when society controlsmore than half your productive force in essence you are a serf.So a solution to the Danish tax coercion scheme is not necessary as such, but for allhuman beings in the Kingdom of Denmark who wants to be able to choose on the majorityof issues in their life and who live by a morality which values of work, it is not only the justand righteous way, it is the only way.On the broad lines of thought the suggested new tax-scheme will work, and the funding isin place. Page 19
  • 20. INEP WORKING PAPER 4. FURTHER ANALYSIS AND ELABORATIONWhat would be of great interest is to see how this scenario would present itself, when applied in the SMECor ADAM models.In the following a short introduction to the modelling and the overall method of application is discussed.The ADAM model developed by the central bank of Denmark is a framework within the Keynesian tradition ofeconomic modeling. A simplified overview of the model is presented in figure 8 below.The key drivers in evaluating the proposed new tax scheme are the private consumption (fCp – ordisposable income Yd), the unemployment (Ul) and domestic prices (dp), whereas factors such as publicspending (fCo), personal welfare income transfers (Ty) and direct taxes (Sd) are given from the proposal.An evaluation of the consequences of introduction of the proposed system will thus depend on a givennumber of assumptions, for which there are no current guidelines in Danish history, as tax cuts in thismagnitude has never been introduced before.Looking at the macroeconomic factors and their partial development in other countries with tax cuts ofsignificant magnitude should be a reasonable viable alternative, even though the real partial effect no doubtwill be impossible to determine with certainty. Page 20
  • 21. INEP WORKING PAPER ADAM En model af dansk økonomi, Marts 1995, Redigeret af Poul Uffe Dam, Danmarks NationalbankFigure 8 – source : The central bank of Denmark, “ADAM a model for the Danish economy”. Page 21
  • 22. INEP WORKING PAPERThe same applies to SMEC which is the macroeconomic model of the Economic Counsel. In addition thereare some endogenous variables which will be affected directly, and also some relations betweenendogenous variables internally and between endogenous and exogenous variables which might changefrom the empirical evidence, when such a vast change is introduced.Source: SMEC, Modelbeskrivelse og modelegenskaber, 2006, Dorte Grinderslev og John Smidt, Arbejdspapir 2007:1Figure 9 – source: Economic Counsel, SMEC, “Modeldescription and model properties”.This however does not prevent that the application of the models with perhaps a few manual adjustmentsand modifications would be highly interesting; bearing in mind the limitation of the interpretations of theresults.Application of the proposed framework in the ADAM-model will be an area of investigation for another paper. Page 22

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