U.S. Lessons From Danish Taxation

August 20, 2018

Discuss U.S. taxation with an American citizen for any length of time and there’s a good chance that, there’ll be a comparison to European tax systems. Most Americans lack knowledge of the finer details of European taxation.  Nonetheless, they’re deeply fascinated with the relatively high tax rate systems currently in place in various European states.

For some Americans, European taxation is seen as a model around which we should craft our own system.  Such Americans contend that the higher rates seen throughout Europe are necessary and desirable.  They ensure that all citizens have access to “basics,” such as adequate health care, higher education and other similar services. Other Americans, however, contend that the “socialistic” nature of European taxation is undesirable.  Some contend that it would ultimately lead to a lower quality of life for most Americans.  This blog post picks one such European system, Danish taxation, and compares it to the United States taxation system.

We’re focusing on Danish taxation because, in many ways, Denmark can be viewed as the quintessential European country.  That is, at least when it comes to taxation. Phrased differently, Danish citizens face a comparatively high tax rate, but also enjoy many perks not available to many Americans.

Basics of the Danish Taxation System 

Let’s start our examination by first recognizing that there’ll be no end to the “basic needs” vs. “socialistic” taxation debate, at least, not anytime in the near future. Both sides have enough evidence to muster reasonable arguments. But let’s also recognize that an examination of a European system of taxation, such as the Danish model, can nonetheless give us a clear picture of what a European model of taxation in the U.S might look like.  

Under the Danish taxation system, citizens who earn income will pay some amount of tax.  That’s regardless of whether they earn a lot or very little. All income in Denmark is subject to what is referred to as the “gross tax”.  That’s an 8% tax, automatically assessed before any layers of income tax even come into play. The threshold for income tax in Denmark is approximately $7,800.00, and Danish citizens whose annual income doesn’t exceed that amount aren’t subject to an income tax, even though the gross tax is still assessed. This is first fundamental way in which Danish taxation diverges from the American model. 

Layers of Danish Tax

Above and beyond the gross tax, Danish citizens face several layers of income taxation: they face state taxes, municipal taxes and health care contribution taxes. The current rates for the state tax range from 8% to 15%, while municipal tax rates range between 23% and 28%. The health care contribution tax is currently pegged at 5%. The Danish system is also progressive, so even though all income earners pay a relatively high blended rate in Denmark, higher income earners bear a bigger tax burden than comparatively lower income earners, relative to their income. So much so that, depending on income levels, it’s possible for a Danish citizen to pay more than 55% of their gross income to the state! 

Danes also face higher rates on excise taxes. The Danish “value added tax” or VAT, which is a type of excise tax, is presently set at 25%, which makes it one of the highest VAT rates in the European Union. And unlike other European countries, the Danish VAT doesn’t generally is generally adjust based on the type of item purchased.  Accordingly, the hefty 25% rate applies to nearly everything.  

Assessing the Danish Model 

The high rates for individual taxpayers in Denmark apply not just to high earners but to low and middle earners as well. This means that a Danish schoolteacher will pay nearly the same rate as a hedge fund manager. The Danish system may be progressive, but it’s not nearly as progressive as the U.S. system, and this fact alone tends to discourage many Americans from even considering the Danish model.  

In the end, comparing U.S. taxation and Danish taxation is a bit problematic simply because these two systems serve very different countries. The United States has a much, much, larger population than Denmark, and we have a whole host of concerns and issues which are absent in Denmark. Sure, Danes receive state-subsidized higher education, and health care is free across-the-board; but we would do well to remember that the educational system in the U.S. is vastly different and is geared toward different purposes than those in Denmark, and the same is true for our health care system, as well. It’s important, then, that we don’t view the perks of the Danish taxation model in isolation but, rather, as attributes that tend to follow from the unique institutions of Danish society.

If the U.S. offered free higher education, for instance, shouldn’t we also follow the Danish educational model across the board? If so, that would mean radically altering the nature of our entire educational edifice.  That’s something most Americans fail to consider when comparing our system with other systems. Danes don’t just get free higher education, they get free Danish higher education.  That’s a something that not every American cares to receive.  

Call a New York Tax City Attorney For Help

The professionals at Mackay, Caswell & Callahan, P.C., enjoy keeping up with current events and global trends.  The world of tax and finance is no exception.  That’s because they ultimately lead to better result for our clients. As we’ve pointed out many times, the world of tax is constantly changing.  Staying on top of trends is a great way to anticipate what may happen in the future.  It also happens to allow us to provide better counsel and better service.

It’s not likely that the U.S. will adopt the Danish taxation model anytime soon.  Nonetheless, it’s always possible that we might adopt bits and pieces of it.  Accordingly, it’s important to be aware of how that model stacks up against our own. In the same vein, if you have tax or business law issues that you’re facing, feel free to reach out to a New York City tax attorney to draw on the unique insights we’ve developed and see for yourself how our experiences can address your unique concern.  

Image credit: Jacob Bøtter


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