Section 1: How is tax revenue generated?

Danish tax authorities are expected to collect DKK 812 billion in tax in 2008 (December estimate). This amount comes from many different tax sources including income tax, property tax, corporate tax and various duties. The diagram below shows the proportion of the different types of taxes and duties.

Figure 1: Income from taxes and duties in 2008 divided into types of taxes

Income taxes

About 52 % of the total tax revenue comes from income tax. This includes tax on wage income, interest and dividends as well as property value tax and the labour market contribution. Income tax makes up a significant part of the total state revenue.

Both people and companies pay income tax

Companies pay a somewhat lower tax than private people. The income from corporate tax makes up 8 % of the total revenue. Corporate tax in Denmark is slightly higher than the EU average but over a number of years has fallen significantly (from 50 to 28% in 2008) due primarily to international competition for attracting business investment.Corporate tax has thereby to an increasing extent become a tax on the workforce and not just on capital.

Consumption tax

In Denmark, 25 % VAT is paid on virtually all goods and services. For example, VAT is paid on all groceries, clothes, cars etc. Some goods and services are however exempt from VAT. These include newspapers, the health sector and banking services. These companies pay a payroll tax instead, which is a tax paid on the total payroll.

Income from VAT makes up around 22 % of the total revenue.

Furthermore, a number of other consumption taxes are levied on various goods and services. For example wine, beer, liquor and tobacco, and tax on electricity, water and heating. Some of these taxes are “pure” consumption duties with the sole purpose of creating revenue for the state while other taxes are environmental taxes aimed at regulating consumption. Examples of this latter category are the energy taxes and packaging tax.

The tax burden

The tax burden is an expression used for the total revenue to the state from tax and duties measured in relation to society’s annual production, also called the gross domestic product (GDP). The tax burden in 2006 has been estimated at 49.3, se figure 2. The tax burden peaked in 2005 with 50.9. It is especially the tax on pension yields - that depends heavily on the stock market and interest levels - that led to an increased tax burden from 2003 to 2005. Likewise, revenue from corporate tax in 2005 was larger than usual due in part to the rise in oil prices.

The tax burden is expected to fall still farther from 49.3 % of GNP in 2006 to 48.4 pct. of GNP in 2008. It is especially an expected decrease in revenue from corporate tax that will reduce the tax burden. Tax reductions of 5.2 billion DKK and the tax stop also contribute to the expected reduction of the tax burden in 2008.

Figure 2: The tax burden in Denmark from 1971 to 2008

Source: Statistics Denmark and the Finance Ministry's Economic Report, December 2006.

Trends in generating tax revenue

Progressive personal income tax to the State has decreased during the last 10 to 15 years, the tax basis has been broadened and greater emphasis placed on labour market contributions and green taxes on pollutive consumption. This is shown in table 1 where the total taxes for the period 1983 to 2008 are shown according to types of tax.

The proportion of national personal income tax to the State in the total tax revenue has from 1983 to 2006 been more than halved from about 24 % to less than 11 %. On the other hand, labour market contributions have increased so that they in 2006 constitute about 9 %.

As a result of the municipal reform and the financing reform on the municipal sector, there has been a structural change in the distribution of income tax between the State and the municipalities. Since there are no longer are any counties, county tax has been repealed. Instead, an 8 % national health care contribution has been implemented, and at the same time giving the municipal authorities the power tp compensate for an additional deficit by raising local taxes. As a part of the financing reform, all taxes from people with limited tax liability are transferred entirely to the State. The big increase in personal income tax to the State from 2006 to 2007 should be seen in this light. There has been a corresponding decrease in municipal taxes.

A small drop is expected for personal taxes proportion of GNP in 2008 as a result of tax deductions in “Lower tax on Labour”.

Source: Statistics Denmark and the Finance Ministry’s Economic Report, December 2006.
Note: The figures after 2000 are based on the new revised national accounting figures from Statistics Denmark.
1) County tax is repealed in 2007. Instead a somewhat higher municipal tax has been imposed for the new, larger municipalities that have taken over a part of the counties’ tasks, and an 8 pct. national health care contribution.
2) ATP, unemployment insurance etc. After 1999, the figures include early retirement contributions.
3) The annual figures before and after 2000 are incomparable. The figures exclude imputed rental tax in 1983-2000, but include property value tax after 2000.
4) Estate tax, gift and inheritance tax, fees etc.

Since the 90’s, VAT and duties’ percentage/share has been around 32-33 %.

Tax revenue from real interest tax - that was replaced by tax on pension funds’ yields - has varied greatly due to large fluctuations in share prices on pension funds’ holdings. The proportion of tax from pension funds’ yields in 2002 is estimated to be negligible due to setting off negative tax carried forward from 2001. The proportion has gradually risen to a very high level in 2005. In 2006 and 2007, tax from pension yields is expected to fall drastically.

The proportion of business taxes has been rising since the start of the 90’s due in part to the economic upswing in the early 90’s and again in recent years.

Tax in Demark compared with other countries

The tax burden in Denmark is quite high compared with other countries, se figure 3. In 2005, only Sweden had a greater tax burden than Denmark. In 2006, where there are statistics available for the tax burden in Denmark and Sweden, the tax burden in Denmark is marginally higher than in Sweden.

Figure 3: The tax burden as a percent of GNP in Denmark and the other OECD-countries, 2005

Source: Revenue Statistics 1965-2006, OECD November 2007.

The traditional measure of the tax burden is influenced by a number of technical factors that are not really part of taxation in society. These include the taxation of transfer incomes, tax payments from the public sector to private individuals, deferred payments linked to pension savings and corporate tax as well as the way taxes are split between indirect and direct tax.

Compared to other countries, the Danish tax burden tends to be overestimated because tax is paid on transfer incomes. Taxing transfer incomes leads to a tax on income which is not taken into account when measuring the GDP. Correspondently, tax payments from the public sector should not be included in the tax burden as these taxes do not mean extra tax for either people or companies.

On the other hand however, duties do form part of the GDP. Since duties do not make up a part of the income basis for taxes, the traditional tax burden will therefore be underestimated.

Consequently the tax burden is influenced by shifts in the balance between taxes and duties in the total tax payments. These shifts might be due to changes in the consumption quota, trade conditions or legislative changes.

Denmark is that OECD-country where personal income tax constitutes the largest part of total taxes and duties, se figure 4.

This must be seen in perspective however, in as much that we here in Denmark as opposed to most other countries do not place particular importance on social contributions with regards to financing the welfare state. Income tax and social contributions are in reality the same type of tax. Whether the tax is collected as an income tax or as a contribution paid either by the employer or the employee means nothing with regards to bearing the final burden – also called tax incidence. The burden of social contributions paid by the employer in the final end is shifted over on the employee in form of lower gross wages.

When you add up income tax and social contributions, you will see that income tax in Denmark (the light blue and dark blue areas) makes up a portion of the total taxes and duties corresponding closely to the average among EU- and OECD-countries.

The other EU- and OECD-countries however generally raise a slightly greater portion of their tax revenue from property taxes.

Figure 4: The tax structure in Denmark and the other OECD-countries

Source: Revenue Statistics 1965-2006, OECD, November 2007.