Workers the target of government’s tax reform

At the heart of the government’s tax reform is reducing the tax burden of middle class and blue-collar workers and increasing the incentive to work for low-income earners

May 29th, 2012 10:54 am| by admin

Hard-working low and middle income Danes will benefit the most from the government’s tax reform that was proposed today.

Key among the proposals is an increase in the tax deduction for being employed as well as a rise in the threshold for the top tax bracket, topskat.

“What’s absolutely central in our reform is that it should pay to work,” the tax minister, Thor Möger Pedersen (Socialistisk Folkeparti), said. “Many people will get more out of working with the reform. An ordinary unionised worker will make about 1,000 kroner extra a month after tax from working rather than taking social welfare. So it’s definitely something that will be noticed.”

Danes on pensions will not be covered by the planned increase in the topskat threshold, however, as the government has focused its reforms to benefit only those in work.

“We know that there are relatively few people working after the retirement age,” the economy minister, Margrethe Vestager (Radikale), said. “Pensioners who have a lot should also contribute to financing the tax reform.”

Opposition party Venstre has criticised the decision to exclude pensioners, however.

“It’s completely unreasonable that people should be paying more tax on your work simply because you have reached a certain age,” Venstre’s finance spokesperson, Peter Christensen, said.

But the economy minister disagreed and argued the proposal fit well within the overall target of the reform.

“We set out to lower tax on work, which is why we’re financing in a way that least affects the incentive to work,” Vestager said.

The tax reform is hoped to increase the workforce by 14,600 people. This will be achieved by raising the threshold for topskat for everyone below retirement age so that 250,000 Danes currently paying topskat will drop below the threshold.

The idea is to make it more attractive for nurses and metal workers, for example, to take on extra shifts or go from part-time to full-time.

Topskat was never meant to target so many metal workers, nurses and primary school teachers,” Pedersen said, adding that the 700,000 Danes currently paying topskat is far too many.

The government wants to spend 4.8 billion kroner in reducing the topskat threshold and another nine billion in increasing the employment deduction and the introduction of a special employment deduction for single parents.

This deduction is being called the ‘Carina deduction’ after the debate this winter about single mother 'Carina' who benefited very little from taking a job rather than staying on social welfare.

According to the government’s calculations, the reform would double the number of people who would earn at least 1,000 kroner more a month by working rather than taking benefits.

The reforms would also reduce the number of people benefiting less than 2,000 kroner a month from taking a job, from 150,000 to 95,000.

Economics professor Michael Svarer from Aarhus University agreed that the reform would increase the amount that Danes would benefit from working.

“If you want to make a socially-balanced tax reform, this is the most obvious way to do it,” Svarer said. “Because it is the lowest income groups that will benefit the most.”

The tax minister also stressed that the tax reform dealt with more than providing economic motivation for the unemployed. It was also about sending a signal for those who are working hard.

“It’s not just about money. There are lots of people who have jobs even though they would earn more on social welfare. People want to work. But our starting point has to be that in Denmark you should be able to provide for yourself without feeling a fool. That’s why it’s reasonable that it should better pay to work,” Pedersen said.

Other highlights of the government's proposed tax reform include:

  • The tax deduction on interest payments for home owners with annual interest payments of over 100,000 kroner will be cut. Earns the government 2.6 billion kroner.
  • The child benefit check for families earning over 761,000 kroner will be scaled down. Earns the government 300 million kroner.
  • Businesses will be able to deduct 115 percent of investments instead of 100 percent during 2012 and 2013. Costs the government five billion kroner.
  • The entrepreneurship tax will be abolished. Costs the government 390 million kroner.
  • Social welfare benefits will rise only according to inflation and not according to the average wage increase. Earns the government three billion kroner.
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