Tuesday, September 20, 2016

Nordic Welfare: An Example of High But Efficient Taxes

Even though the tax system of the Nordic countries is not exempt from criticism (read this article by US News, for example), it is still an interesting case to be studied by economists and sociologists. In this cold region of the world, citizens pay higher taxes compared to many countries, however, the legal control of such money flow is strict and the generous services that the Nordic States provide in return make people pay willingly more than 20% of their income.

Image courtesy Edward Stojakovic | Flickr
It is considered that the welfare model of the Nordic countries is universal. In addition, the benefits are granted individually (for instance, married women have a number of independent rights of their husbands.) In northern Europe, the State is involved in the organization of almost all aspects of society, and the financing of social welfare available to citizens becomes a huge extent if we analyze other countries from the region. For this reason, the Nordic welfare model requires a tax system that includes both a broad tax base as a progressive tax system run by a redistribution of income from the richest members of society to the poorest. Public health care is an important part of the Nordic model, ensuring quality health services regardless of the economic circumstances of the individual.

Some economists who defend this form of Nordic organization argue that this is simpler and understandable in the case of other European nations; nevertheless, in Scandinavia, most welfare tasks are taken over by the state or local authorities, and only in a limited way by individuals, families, churches or national welfare organizations. However, some economists argue that the increase in state interference in all public affairs (and the forced redistribution of income) leave the most productive members of society with a limited income for their work, which is not a positive fact in a market economy. They argue that the system seems to work to be implemented in small countries with a high level of education and a strong ethic that emphasizes the value of work. Interestingly, despite the generous welfare benefits, unemployment levels in the Nordic countries are still among the lowest in the world.

“This social democratic model harmonizes with capitalism and has backed the development of a high standard of living in the area,” says Adam Greene, from Greene & Company LLP. “From any perspective, the welfare model of the Nordic countries is a concept adopted consensually by both political parties of right and left. Sometimes the level of benefits is discussed, but hardly benefits itself.”

Why is this model successful? In first place, this is not a wide-known region and its existence is often overlooked when analyzing many events of Western Europe. In second place, the geographic location is a relevant factor. The three Nordic countries form a triangle in the Skagerrak, the strait that connects the Baltic Sea with the Atlantic waters. In a ground-level, the three Scandinavian countries are one mass of continental land, although the distance the water between Denmark and Sweden is minimal in the Strait of Oresund - the current bridge connecting Copenhagen (Denmark) to Malmö (Sweden) is 7.8 km in length -.

Another feature to note is the general low population. Except for Sweden, with 9.5 million inhabitants, the other three countries are populated by a range of 5 and 6 million people. This factor, at an economic and a political level, is very important: it affects - and we were able to see it in the leaders of these countries - the economic model that such States can develop on the basis of available human resources, as well as appropriate policies based on low populations, compared to other European countries.

The welfare system in these nations is mainly based on two facts: the political and economic intervention and a remarkable political awareness and participation of society. This, over many years, has created a circuit that is constantly fed back and that favors both the correct performance of public actors as the demand levels of society on public policies and progress of the countries as wholes. Something fundamental is that States intervene actively in the national economies. One of those forms of action is through fiscal policy: taxes.

The idea of ​​this State interventionism is that they must redistribute taxes fairly among all people, so that everyone has the same opportunities for development through public education (which is equal for all), universal health care, quality employment, access to housing, social policies for the most disadvantaged, etc. Logically, all these political intentions cost a lot of money; money that should come from somewhere. Of course, the normal route is through taxes.

It is possible that before the great economic changes the world is experiencing, this model also wobbling. But that does not diminish its importance.

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