Free Trade and Taxes – Denmark Edition

Matt Yglesias is in Denmark.  I can sort of travel vicariously by blogging about Denmark as well, so here we go….  Not surprisingly, the Danes have very high taxes:

The overwhelming fact about Danish public policy is that taxes in Denmark are really high. There’s a substantial VAT and also a substantial income tax. You pay taxes to buy a car, and you pay higher taxes for heavy cars. Gasoline taxes are high (gas costs almost $7.50 a gallon) as are taxes on electricity, which account for more than half the cost of electricity to consumers. In exchange for all this, the Danes have basically achieved all the stuff progressives say they want. The country is rich, clean, and highly egalitarian. The high taxes finance generous public services, and the high levels of expenditure allow the country to do without a lot of extraneous business regulation which helps keep the place economically dynamic. According to surveys, the people are all very happy, which is exactly what you would expect from a very rich, very egalitarian society. And as this trip has emphasized, they do it all while doing much less polluting than Americans do, despite a higher average material standard of living [….]

All of which is just to emphasize a point I’ve been making a lot over the past few months: there’s no way to have a progressive renaissance in the United States unless progressives find some politically feasible way of directly making the case that higher taxes for better services can be a good trade. And it’s worth trying to be honest about this. The other American journalists I’m traveling with, all lefty environmentalist types, can’t stop complaining about how expensive basic consumer goods are here. And it’s true, stuff’s expensive! But college and preschool and doctors and hospitals are all free, and the carbon emissions are low. This is, I think, a good trade but it really is a trade. Low taxes plus cheap dirty energy and large numbers of poor people will give you cheaper restaurants.

Interestingly enough, they also have very low unemployment – current estimates place it at about 3.7%, while popular support for free trade and globalization is at a staggering 76%.  In many other ways, the Danish economy differs from our own.  It’s more unionized, but it’s also much easier for employers to fire their employees.  While the tax burden is much higher, corporate taxes and capital gains taxes are much lower than in the United States.  All in all, it’s not a bad system for a globalized world.  Fewer state intrusions into the economy is a pretty good trade-off for higher income taxes, especially when safety nets are as strong as they are in Denmark.  A higher percentage of Danes are in the work force than Americans, so the social welfare system they’ve erected doesn’t seem to be a disincentive to find work.

Of course, one assumption we have to make is that the Danish government is very good at spending the revenue they receive – perhaps a good deal better than we are.  Before you can really approach increased government spending on social services, you have to make sure you’re doing it in a sustainable fashion.  America, for whatever reason, seems particularly bad at effectively managing its spending, and the system is rife with waste.  Simply raising income taxes and throwing more money at our many programs may end up having very little effect, simply because so much of that money would simply evaporate into the ether.  Many of the problems we face require structural, not just financial, fixes, and unless you tackle that first, all the funding in the world won’t change a thing.

In any case, what you see in a place like Denmark is a combination of progressive and conservative means teaming up to achieve high employment, social security, and prosperity.  Progressive ends are achieved with egalitarian social safety nets, and conservative ends are achieved with high employment rates, very free markets, and so forth.  It’s a pretty good example of how seemingly conflicting ideologies can work together to produce a stable, prosperous society.

A VAT is hardly a progressive tax, but Denmark uses one in conjunction with its very high, and very progressive, income tax.  Similarly, low corporate and capital gains taxes are fairly conservative tax policies, and they’re exactly the sort of tax breaks that lead to job growth and spur continued growth in the economy.  Couple this with few trade restrictions and you have a very libertarian-friendly economy, with a very progressive safety net structure.  It’s hardly socialism, but it’s hardly the economy many liberals in the United States are clamoring for either.

This is why it’s important to point out that European countries are headed to the left and to the right of us, and when we talk about Europeanization, we should be specific.  They may be to the left of us in their safety nets, but they’re moving to the right as well – freeing their economies, embracing globalization, and getting government out of the business of messy, complicated, and burdensome regulations.

What I glean from the Denmark model is this:

• Keep corporate and capital gains taxes low to encourage economic growth and to offset high income taxes.
• Combine income taxes and other progressive taxes with more regressive taxes like a VAT and sales tax to maintain strong safety nets.
• There is a trade-off to be made between higher taxes and government spending, and less government intrusion into markets.
• Both the left and the right in this country need to look at how European countries like Denmark, Switzerland and the Netherlands use their political opponents’ good ideas to create stronger economies and more stable societies.  Too often both sides of the debate in America get caught up in their own dogma, and that lets good ideas slip by.
• Once safety nets are in place, this creates more room for the economy to breathe – if they’re put together properly.  All the more reason for conservatives to support health care legislation.  If safety nets can lead to less government involvement in the economy, and lower taxes on business investment, that’s probably a trade worth having.
• Questions remain about how well European models would work in the vastly more diverse and populace United States.

See also Yglesias on Denmark’s health care system.