Understanding The Logic Behind One of the Highest Tax Rates in The World: Denmark

Image courtesy Matt Kieffer | Flickr

Although from the outside, if only focusing on the tax rates themselves, some may think Denmark is way off and it’s simply ridiculous to pay such high rates. The fun fact is that in reality the Danish citizens are nine out of ten pretty happy about paying one of the highest taxes in the world. First of all, let’s understand what it is exactly that Denmark taxes its citizens. Denmark has two taxes: a state income tax and a local income tax. Although the local income tax is a fixed rate, the state income tax is a progressive tax. This basically means that it increases as the person’s ability to pay, or income, increases. They have income tax, land value tax, local income taxes, and VAT. The average annual income in this country is roughly 39,000 euros, almost $43,000, and if we average out all of the previously mentioned taxes it comes out to approximately 45% in income taxes. Now, if someone earns more than 61,500 euros, almost $67,000, they have an additional 7% added on to the aforementioned. From the outside, once again, many may not understand how people in Denmark could pay such high taxes with a smile. The first thing that you have to understand is the mind frame and culture of most European countries. They see taxes as an investment and a straight path towards a better quality of life. The notion that this money will get back to them at some point in the form of quality of life is what gives them peace of mind. Now, Denmark is not alone on this list of high taxes. It is accompanied by Netherlands, Belgium, Japan, Austria, UK, Finland, Sweden and Ireland, all of which are known for being the highest taxed countries in the world. Despite this, some of these countries are also known as the “happiest places on Earth”. So, now let’s get down to understanding why this actually does make sense. 

Image courtesy Alan Cleaver | Flickr

Education

In Denmark, all citizens get free education all through university or college. This is a huge advantage not only thinking about the short term, but the long term. Teens are able to join any college and make their own path, by studying and working hard. Parents don’t have to worry about how they are going to pay their children’s education, which increases their opportunities to lead a happy life. Education is compulsory up to 15 or 16 and from there around 82% go on to study further education. This is one of the reasons why literacy in Denmark for both men and women soars to about 99%. Almost all institutions in Denmark are completely tuition free, and will apply for those that are Denmark-born or have a permanent resident visa or permit, residence permit, humanitarian visa, or if they are from the Nordic Council or any country in the European Economic Area or European Union.

Health care

In Denmark most of the healthcare is financed by regional and municipal taxes. An average of 9.8% GDP is spent on healthcare, and there is 1 doctor for every 294 people in Denmark. Healthcare in Denmark is yet another factor that makes its citizens people with less anxieties and concerns in everyday life. Additionally, it is one of the most advanced countries in health care technology. Electronic Medical Records and Electronic Prescribing are used by most practitioners, but in reality has actually not been able to reach its full potential due to a system fragmentation.

Young and elderly citizens

Denmark, besides offering tuition-free education, the government gives students $900 per month.  As for the elderly, the government invests about 1 billion kroner per year, or approximately $152,000, at a municipal level. A lot of the investment in the health sector is done so with the initiatives that focus on elderly and dementia patients. It also goes towards improved maternity care. 

The quality of life, as you can see, is a huge benefit to the people who live in Denmark, and this comes at a price high tax rates. Which is why, most Danish people see their taxes as an investment, instead of an expense. Whereas, in the states we are still trying to find ways to reduce personal and business taxes, which you can read more about on the Adam Greenville Blog. When most Americans are asked they are not willing to pay higher taxes, despite the advantages this could bring to the quality of life. Some of the main differences between the US government and the Danish government comes down to the role the government itself plays. In Denmark the government spends almost 43% of the country’s economic activity, making it the eighth highest in the world, based on a report published by the World Bank in 2012.  In the US it is 24% making it 65 out of 114.  Of course this spending, will require somewhere to get the money from, which is where heavy taxation becomes essential. In the US, in 2013 the taxes came up to 25.4%, and in Denmark it was 48.6%, almost double to the US.

The Countries With the Highest Taxes in the World

When it comes to the countries with the highest taxes in the world, most people imagine a simple list that can be ordered from highest to lowest. In reality, there are multiple forms of taxation to consider, from the dreaded personal income tax to corporate taxation. As such, while one country may have a surprisingly low income tax, it could still lead the world in terms of corporate taxation. This all makes getting to the bottom of where people pay the highest taxes rarely as simple as it initially may seem. 


Personal Tax Rates
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Coming in at number one on the list of countries around the world with the highest personal tax rates is the nation of Aruba. Aruba is an island country governed by the Netherlands that has a hefty tax rate of 58.95 percent on all personal income over $171,149.

Although Aruba has the highest income tax rate in the world, its citizens have the lowest average income compared to the other countries with the top 10 highest income taxes. 

Because the population of Aruba only earns an average of $23,000 annually, wealthier residents are expected to pay more to make up the difference. Offering some financial relief are Aruba's generous tax policies for married couples, who receive a 3 percent tax break. Workers in Aruba can also rest easy knowing that employers cover their Social Security contributions, leaving more of their paychecks in the bank.


Corporate Tax Rates
The United Arab Emirates has the highest corporate tax rate in the world at 55 percent. Out of 163 nations reviewed by the Organization for Economic Cooperation and Development, this figure is much higher than the nation of Chad, which has a corporate tax rate of 40 percent. The United States is another top contender with a corporate tax rate of 39.1 percent. 

It's worth noting that the United Arab Emirates — which is actually a federation of seven different Emirates — makes up for its high corporate tax rate by not imposing a federal corporate income tax. Instead, most of the emirates impose more forgiving individual tax decrees that vary up to 55 percent. Corporations that produce oil, gas and other natural resources from the area also face harsher tax penalties. 


Overall Tax Rates
When it comes to the highest overall tax rates, Italy ranks at the top with a rate of 50.59 percent. While Italian workers are expected to give the government more than half of their paychecks, this high rate applies after Social Security contributions have been paid. Italian tax rates are even higher than they seem at first glance when you consider how little an Italian citizen has to earn in order to qualify for the highest tax rate.

Italy's highest tax rates kick in at $125,000, while the United Kingdom's top rate of 45 percent begins at an income level of approximately $250,000.

European countries tend to have higher overall tax rates than others around the world, but these rates vary. Each country has its own set of rules governing Social Security contributions, payroll taxes, and other financial exemptions the country's residents may be entitled to.

Tax Rates in the United States
While the United States doesn't make the top of any list for the highest tax rates, it ranks highly in each of the prior categories. United States workers in the highest tax bracket take home only 60.56 percent of their earnings, according to New York State Tax.

Compared to Aruba, the highest American income tax rate is 39.6 percent. The second highest income tax bracket in the United States is still 35 percent. 

The United States falls behind Italy, India, the United Kingdom, France, Canada, Japan, and Australia for income tax rates. While the United States ranks third in terms of corporate tax rates — at 39.1 percent — the country is also a world leader in corporate tax deductions. These deductions mean that corporations generally pay less to operate their businesses in the United States than they do in most European nations.

United States tax law is also unique in that state taxes play such a large role in what each corporation pays. Some states have corporate tax rates that are generous enough to make up for higher federal tax rates, giving businesses more incentive to keep their operations in the country. Tax laws between states can vary as widely as tax laws between countries. 

Comparing tax rates around the world requires a broad approach that keeps in mind how different various forms of taxation can be. From income brackets to state policy, the amount individuals and corporations actually pay in each country isn't always the figure seen on paper. Understanding the way these dynamics work with each other goes a long way towards understanding the truth about which nations really have the highest taxes in the world.