Marginal tax for all taxpayers

The marginal tax rate shows how much income tax is paid on the last earned krone or any extra money earned. The marginal tax rate influences factors such as labour supply and savings and in recent years it has been a central parameter in the political taxation debate and in the tax reforms and adjustments that have taken place.

The size of the marginal tax rate is decided to a large degree by the amount the taxpayer’s income exceeds the lower limits for the various income tax brackets.

Table 1 shows the taxation scale’s marginal tax rates on an extra wage income on which income tax and labour market contributions are due, and on an extra wage income exempt from labour market contributions, such as pension savings. Furthermore, the table also shows marginal taxation rates/deductible values for capital income, as well as the tax allowance value for assessment oriented deductions.

1)  Marginal tax is calculated as the tax rate excluding labour market contribution multiplied by 0.92 and with an additional 8%.
2)  Including employment allowance.
3)  Excluding tax on large pensions. If tax on large pensions is paid, the marginal tax is 59.8 pct.

The marginal tax percentages are calculated by using a municipal tax rate corresponding to that in an average municipality. In 2011 this was 25.7 % including church tax. The rates vary from municipality to municipality dependent on the municipal imposition percentages, however the highest rates are capped.

For example, a wage earner in an average municipality earning DKK 300,000 in personal income and paying municipal and church tax, state health contributions, bottom-bracket tax and labour market contributions, has a marginal tax percentage rate on an extra wage krone of 40.9% in 2011. See table 1.

Table 2 shows how people are divided according to various stages on the taxation scale and how they are affected by the different marginal tax rates on any extra income earned. These calculations have been based on representative calculations on the law model and show how taxpayers are grouped according to the size of their marginal tax rate in 2011.

The marginal tax percentage has here been defined as an increase in income tax and labour market contributions as a consequence of an extra income or an extra allowance of DKK 100. It is assumed that there are no expenses involved with acquiring this extra income.

Note: The law model calculations have been made based on a random sample of 3.3% of the population. Data from 2008 has been calculated for 2011 based on December 2010 predictions.
1)  Increase in income tax and labour market contributions on an extra wage income of DKK 100.
2)  Increase in income tax on an extra income of DKK 100 (e.g. pension).
Labour market contribution will always be payable on wage income so that no one has a total marginal tax rate for wage income including labour market contributions of zero, see table 2.

Around 11% of taxpayers have a marginal tax rate of zero on a change of income on which labour market contribution is not payable. This is partly due to the fact that their income does not exceed their personal allowance, and partly because a change in income does not have any effect on the income tax payable by their spouses.

Approximately 600,000 taxpayers pay between 35 and 39 % on extra income earned, and approximately 2.8 million taxpayers pay between 40 and 44% in tax and labour market contributions on any extra income earned. Taxpayers in these groups consist mainly of those who pay municipal taxes, heath contributions and bottom-bracket tax

15% of all taxpayers pay over 50% marginal tax on wage income.

The division of marginal tax rates on capital income is more compact than the corresponding division for wage income and the level is lower. 66% of all taxpayers have a marginal tax rate on capital income below 35%. This covers people with negative net capital income (taxable value of tax relief on interest). The remainder of taxpayers have marginal tax rates above 35%. This covers people with positive net capital income, who pay bottom-bracket and top-bracket tax.

Variations in marginal tax rates regarding assessment oriented deductions are caused by variations in the municipal tax rates, which in 2011 vary from between 23% to 29% (including church tax).

The reduced range in marginal taxation of capital income in table 2 is repeated in table 3 showing the average marginal tax rates for all taxpayers divided by socio-economic groups. When considering these rates it should be noted that the rate can vary considerably around the average in the individual groups.

The group of top management and high wage earners has the highest average marginal tax rate of wage income including labour market contribution of around 52 1/2 %. Wage earners at basic level and other have an average marginal tax rate of around 42-43%.

The marginal tax rate for transfer income to pensioners, early retirement pensioners and the unemployed is around 37%.

Note: The law model calculations have been made based on a random sample of 3.3% of the population. Data from 2008 calculated for 2011 is based on December 2010 predictions.
The socio-economic groupings have been made according to Statistics Denmark’s socio-economic Classification. (Opens in a new window).
Note: The groups’ marginal tax rates have been calculated as the average of the individual person’s marginal tax rate.
1)  Increase in income tax and labour market contribution from an extra wage income of DKK 100.
2)  Increase in income tax from an extra income of DKK 100. (For example, pension or unemployment insurance).