The official blog of The Social Democratic Party.

Dane gold: how to raise more tax and get away with it

Denmark has in many ways ‘squared the circle’ of raising a lot in tax while not harming overall prosperity.

By: William Clouston

‘Something is rotten in the state of Denmark’, Shakespeare wrote in Hamlet.

Free marketeers would no doubt agree given how much the country raises in tax – an eye-watering 44.5% of GDP last year, compared to the United Kingdom’s 33.5%.

If the UK’s tax-to-GDP ratio was at Danish levels the Exchequer could generate an extra £220 billion per year in tax revenues.

Yet Denmark’s economy has not suffered from this. Denmark’s GDP-per-capita (the best measure of economic success) is around US$10,000 higher than the UK’s, while growth rates and unemployment have broadly matched ours in recent decades.

Recent research led by the economist Henrik Kleven has identified five key reasons why Denmark has, in many ways, managed to ‘square the circle’ of sustaining a high tax-to-GDP ratio while not harming overall prosperity.

  1. The Danish tax system has widespread third-party information reporting and extensive and well-established ‘paper trails’ that the tax authorities can rely upon to identify and verify taxable activity.
  2. Taxes are levied on a broad basis. Allowances, exemptions, deductions and other distortions are minimised. Broader and simpler taxes reduce the scope for tax to distort the economic decisions of individuals and businesses.
  3. Sizeable amounts of tax revenues are spent on subsidising or providing services which complement working, like transport services, education and training, active labour market policies and child and adult social care. This reduces the potential for ‘poverty traps’ and helps to keep labour market participation high.
  4. Around two-thirds of the marginal income tax rate paid by Danes is set locally. This local income tax surcharge is supported by other local taxes such as a municipal land value-based tax. Local taxes engender a clear connection between revenue raising and expenditure.
  5. High-levels of social capital (in other words levels of trust and mutuality) mean that Danes are generally willing to pay taxes at the rates that they do.

In the fiscal year 2018/19, United Kingdom Government spent £39 billion more than its revenue. Before the coronavirus hit, the 2019/20 forecast was for borrowing of more than £40 billion.

However significant other demands are pressing on the public purse. Health and social care as the population ages is an obvious one. We might also identify ameliorating the housing crisis, the persistent under-spending on education (especially vocational education), the long-running chronic funding shortage that has afflicted defence for many years; also spending on the police, justice and UK’s borders.

The prospect of sustainably funding any, never mind all, of these seems remote in the present environment.

Denmark’s offers a clearly successful alternative example.

A social democratic Government could, over a series of Budgets, re-design the tax system in order to maximise the role of third parties and the flow of information about taxable activities. Reform would also need to broaden the tax base, reducing to the barest minimum the number of exemptions, allowances and write-offs that permeate the current system, and simplify the system to minimise tax-induced behavioural distortions.

There is also no good reason why significant fiscal devolution could not be implemented. Some of the revenues raised would need to be spent on public services that complement labour market participation. Other measures such as improving tax auditing and strengthening anti-avoidance measures (now possible because the UK has left the EU, which inhibits the efforts of tax authorities) could further shore up the tax base.

Vested interests would fight such a programme tooth and nail. We would also need some redistribution to compensate those on lower incomes who would be negatively impacted by broadening the tax base in the short-term.

Nevertheless, Denmark’s example shows that, if social democrats want to replenish the public purse and use the collective power of the state to boost our health, wellbeing and safety, it can be done.

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All Comments (6)

  • This makes sense, I think, but I would add two other considerations:

    First, public expenditure must be visibly efficient, prudent and necessary. Today, that is often very questionable.

    Secondly, large corporations which derive significant revenues from the UK must pay taxes broadly commensurate with their activity. This is essential to regain trust in the tax system. If necessary, we should consider assessing tax based on reasonable margin/revenue assumptions and denying offshore intangible and “service” expenses.

    • I agree with the article and the comments below, particularly Amazon’s minuscule tax payments for example, but the Government must also tackle the rampant money laundering by the banks in the City and the concomitant offshore tax evasion that demonstrates to the populace generally how unfair the present system is. With an enormous financial crisis about to engulf us, there is no time to be lost.

    • I agree with Mr. Baglin’s comments, especially the ridiculously favourable treatment afforded to Amazon and Apple, for example, and would add that the Government MUST tackle the rampant money laundering by the banks in the City and the concomitant tax evasion using British colonies and other offshore countries/entities. The public is well aware of the unfair treatment that they are receiving, compared with large financial institutions, who have almost all been bailed out by the taxpayer in recent years. With a financial tsunami about to engulf the UK, there is no time to be lost.

      • I strongly agree with William Beckett. The SDP needs to make ensuring the multinationals and finance sector paying their tax a central plank of its policy. Without this all economic strategy will fail.

  • anyone who thinks the useless Tories or Starmer’s Red Tories will go after their Friends in the City are deluded there is a real opportunity for the SDP to become an alternative to the 3 tired old parties

  • This is a very interesting article. I am not sure if this would work in this country though. People want good public services but do not want to pay for them. I would like to see a ring fenced tax for the NHS, Adult Social Care and Pensions. I believe that people would be prepared to properly fund this if they could see a demonstrable link with looking after their health needs and to fund their later year provision. This is what National Insurance used to be.
    I certainly agree with a turnover tax on companies to avoid the blatant avoidance of paying their fair share.
    On a local level let’s scrap the iniquitous rate system and establish a local income tax or a sales tax to fund good quality local services. I would even advocate a tourist tax. It seems unfair that visitors can enjoy all local services without any direct contribution

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