Denmark Thrives Despite High Taxes

Denmark has the highest income taxes in the world, but it also enjoys low unemployment and steady economic growth. Economists debate whether Denmark is a model economy, or just a lucky one.

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A story now about a country that seems to violate the laws of the economic universe. It has one of the lowest poverty rates in the world, low unemployment, a steadily growing economy and almost no corruption. That country is Denmark.

Our Planet Money correspondent David Kestenbaum recently visited to find out if things are really as perfect as they seem.

DAVID KESTENBAUM: By one survey, the Danish people are the happiest in the world. And on this day, even though it's pitch dark - it's 4:00 in the afternoon and it's raining - people are out on their bicycles and remarkably chipper.

(Soundbite of a chime)

KESTENBAUM: I took a walk with economist Ole Petersen at the Copenhagen Business School. He pointed out one strange thing: The government buildings, built centuries ago, they're gigantic.

Mr. OLE PETERSEN (PhD Fellow, Copenhagen Business School): All the buildings in downtown Copenhagen and the Royal Castle, the Parliament Building, the ministries are oversized.

(Soundbite of laughter)

KESTENBAUM: The buildings are too big here.

Mr. PETERSEN: Yeah, they were built for an empire and now they exist in one of the smallest states in the world.

KESTENBAUM: It turns out the government today has no problem filling those buildings. If you're one of those people who think the U.S. has big government, well, there is big government and then there is Denmark. The Danish government looks after everyone, provides free high-quality education, free high-quality health care. Of course, it's not really free. Denmark has some of the highest taxes in the world; just getting a cup of coffee costs more.

Ms. ILYA NORDRUM(ph): Okay, thats coffee latte?

Unidentified Man: Cino.

Ms. NORDRUM: Cappuccino, okay.

KESTENBAUM: How much is that?

Ms. NORDRUM: Thirty-three.

KESTENBAUM: And how much is tax?

Ms. NORDRUM: How much is what?

KESTENBAUM: Tax.

Ms. NORDRUM: Tax, 25 percent.

KESTENBAUM: Thats pretty high.

(Soundbite of laughter)

Ms. NORDRUM: It's excellent. Actually, Im Swedish. They have it much better in Denmark because they have higher taxes.

KESTENBAUM: That tax-loving woman was Ilya Nordrum. And that tax, it's nothing. Buy a car, you'll pay 200 percent tax. Thats right. Instead of paying, say, $20,000 you'd have to pay $60,000.

A headline from a Danish newspaper last year read, Denmark Keeps World Tax Title, for the highest taxes in the world. Income tax is high even for the middle class. And yet, a lot of people are okay with it.

Seena Bauolason(ph) is a student.

Ms. SEENA BAUOLASON (Student): I think it is terrific.

KESTENBAUM: You think paying taxes is terrific?

Ms. BAUOLASON: I do actually think it is terrific. And I...

(Soundbite of laughter)

Ms. BAUOLASON: ...I get a little bit angry because constantly in Denmark, there's this talk that we have to lower the taxes, lower the taxes, lower the taxes.

KESTENBAUM: Danes do get things for their taxes. If you lose your job, you can collect unemployment insurance for up to four years.

When I sat down with the economist Ole Petersen, he told me there is a downside.

Mr. PETERSEN: Some people will take the opportunity to stay unemployed because they're paid to stay unemployed.

KESTENBAUM: That means a slightly slower growing economy.

Mr. PETERSEN: Yeah, there's a kind of slack in the system.

KESTENBAUM: Denmark has an interesting kind of hybrid economy. It has this huge welfare state, but it has also fiercely embraced a lot of free market ideas. The unemployment benefits are generous, but it's also very easy to fire people. That makes the economy nimble. Employers can get rid of workers when they dont need them and hire them back quickly when they do. Petersen says losing your job here is just not that big a deal.

Now, all countries face choices like this: How do you want to set up your economy? Those decisions shape how you live and your psychology. In Denmark, for instance, there aren't severe class distinctions because the poor get helped, the rich get taxed, so everyone gets squashed into a big, fat middle class.

One economist told me: Look, we dont have any geniuses and we dont have the best pro athletes - they leave because of the high taxes - but overall we're doing well.

That doing well thing though, it worries Per Gullestrup. He runs a medium-sized shipping company, the Clipper Group.

Mr. PER GULLESTRUP (Clipper Group): A big difference between Denmark and the States is, for example, if you go to a football match - any sports activity -you know, whether you win or lose, it's not so important. You participate. You didnt win, but you participated, where in America, second place doesnt figure.

And we dont have that killer instinct. And I feel that thats dangerous because we have this attitude, you know, we're doing fine, we've done well so far, but that doesnt mean you're always going to do well.

KESTENBAUM: Ole Petersen, the economist, likes a lot of things about his country's economy. But he says one danger with big government, big welfare programs is that they dont shrink. They get bigger and bigger and bigger.

Mr. PETERSEN: And the threat, of course, or the challenge, of course, is that the welfare state could become so big that the economy could collapse because it's so big.

KESTENBAUM: Do you worry about that?

Mr. PETERSEN: Absolutely.

KESTENBAUM: That's the thing about economies that look like miracles - they dont always last. Denmark could stumble but so could the United States.

David Kestenbaum, NPR News.

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