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Taxation and Rebellion: A Historical and Philosophical Perspective Read chapter Read first chapter

2017 | OriginalPaper | Chapter

6. 30 Years of Tax Reforms: How Much Impact on Danish Growth?

Author : Otto Brøns-Petersen

Published in: Taxation in Crisis

Publisher: Springer International Publishing

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Abstract

During three decades, Denmark has witnessed repeated tax reforms. The corporate tax rate and some marginal tax rates on labor have been cut by almost 30 percentage points. Economic theory as well as international empirical data point to a potential for economic growth, especially by reducing high marginal tax rates. In this chapter, the combined effect of 30 years of Danish tax reform is estimated to have increased GDP by almost 10 percent, and economic welfare by the equivalent of 6 percent of GDP. Nevertheless, room remains for further reform, as Danish taxes are still very high, even if the prospect for expanding tax bases further has become slim.

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previous chapter Corporate Profits’ Tax Avoidance: How the “Double Irish” Impedes Global Social Progress and Removes the Prosperity Base Needed for Future Generations
next chapter Convergence of Tax Shocks and Macroeconomic Performance in the Enlarged European Union
Footnotes
1
Which has subsequently been replaced by a large surplus.
 
2
However, capital markets can be segregated so that risky investments, for example entrepreneurial enterprises, have to be financed locally (maybe by the entrepreneur herself or himself), in which case the tax treatment of savings matters for growth too.
 
3
The estimations of growth effects of tax reforms in Denmark are also in terms of level, rather than rate, of change. Any policy which would increase the permanent rate of growth would, of course, ultimately outstrip policies affecting the level only, but are harder to identify. That goes for empirical findings as well. Empirical findings of policies seeming to increase the rate of growth might very well affect levels instead in the long run. A measured higher growth rate could be the result of the economy changing from one growth path to another.
 
4
In fact, as the Solow economy reaches a steady state, the rate of growth declines to zero, if population growth wanes off. In steady state, gross investments equal capital depreciation, leaving the factors of production constant.
 
5
Since there is both an investment and a consumption element to an education, a tax-subsidy scheme will distort the investment-consumption mix.
 
6
However, endogenous growth theory doesn’t rule out affecting the rate of change as well as the level of GDP.
 
7
Provided only that labor and consumption arguments are weakly separable in the utility function.
 
8
A capital income tax can be seen as commodity tax on future consumption goods.
 
9
Whereas in an authoritarian regime, taxes will be much higher, but the level of public good lower than the social optimum.
 
10
The estimated elasticities are elasticities of taxable (labor) income. As pointed out by Feldstein (1995), all margins should be included when estimating the welfare cost of taxation, implying that taxable income rather than mere quantitative labor supply is the relevant measure.
 
11
Formally, all profit shifting will affect GDP as measured by statistical authorities. In reality, only the cost of profit shifting has an effect on growth, since profit shifting is mainly just transfers. In the estimate of the growth effect of corporate tax reform in Denmark, only the cost of profit shifting is included.
 
12
Except China, who benefits from leading tax competition today.
 
13
No significant result was obtained for Denmark.
 
14
Niskanen (2008) is an exception on the revenue side.
 
15
In the experiment, the marginal effective tax rate (METR) is increased by 7.3 percentage points in the experiment, while the average effective tax rate (AETR) is increased by 6.5 percentage points. The debt-to-assets ratio is increased by 4.2 points, while the Danish CIT rate relative to the OECD average (the difference being relevant for income transformation) is increased by 5.4 points.
 
16
This is consistent with the assumption of constant returns to scale in the aggregate production function.
 
17
However, the MoF does not include additional GDP effects from income transformation nor debt-to-equity ratio.
 
18
The literature study does not take into account subsequent studies of the growth effect of banking crises. Since corporate taxes reduce the solidity of the banking sector, and since the solidity affects the risk of a banking crises, this channel could be quite important. According to Brøns-Petersen (2014), the corporate tax implies an expected cost of ½ percent of GDP from banking crises alone.
 
19
The qualitative labor supply is subject to an elasticity of similar average size. However, because of the composition of the tax rate cuts in the experiment, quantitative effects are larger than qualitative ones. Overall, the behavioral responses in the STØV model are relatively conservative compared to the empirical literature cited in Brøns-Petersen (2016b).
 
20
Tax changes are marginal, and the elasticities of substitution are compensated. Neither is fully fulfilled. However, income effects in the STØV model are small (reflecting empirical findings), making compensated and uncompensated elasticities numerically close. The latter implies a small, downward bias in the estimated welfare effect, while the changes not being marginal imply an upward bias.
 
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Metadata
Title
30 Years of Tax Reforms: How Much Impact on Danish Growth?
Author
Otto Brøns-Petersen
Copyright Year
2017
Book
Taxation in Crisis

Print ISBN: 978-3-319-65309-9

Electronic ISBN: 978-3-319-65310-5

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-3-319-65310-5_6