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 to the right shows the proportion of the different types of taxes and duties.
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.
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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.
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”.
This information was gathered from the Danish website skatteministeriet. This is for educational purposes only. I take no credit for the research that went into its production. Even if I'd wanted to.
http://www.skm.dk/foreign/english/taxindenmark2008/
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