The Danish government has secured enough support from other political parties to push ahead with its tax reform proposals, albeit with some alterations to previous plans. The highest income tax band will remain despite initial proposals for a 1.5% cut.
Despite opposition from the Liberal Alliance party, who walked out of negotiations, the government managed to gain support from the Danish People’s Party enabling them to enact the tax reform proposals announced in early February.
The amended proposals, which take into account some of the Danish People’s Party’s requests, will substantially change the income tax system.
Personal taxes in Denmark are currently both high and complex. Currently, state income tax consists of three rates from 5.25% to 15%. However, there are also local municipal taxes, which vary by locality and range from 22.7% to 27.8%, and an optional 'church tax'. Furthermore, an 8% health care contribution is levied, in addition to an 8% labour market contribution. As a consequence, taxpayers earning as little as EUR40,000 face a top marginal rate of around 60%.
Within the new proposals the top tax band will not be reduced to 13.5% as previously proposed, but instead it will remain at 15%, however thresholds will be adjusted instead. The middle tax rate, which currently stands at 6%, will be abolished, resulting in more taxpayers paying the lowest rate of 5.25%.
The income tax amendment, the largest part of the Danish stimulus package, will cost the government some DKK28.5bn (EUR3.82bn), and will not be fully financed until 2019 the government has warned.
Other fiscal measures agreed this week include subsidies worth DKK1.5m for homeowners and construction companies renovating properties, particularly when making energy-saving improvements.
Citizens will also be able to withdraw savings from mandatory pension funds (SP-pensions) during 2009, in order to boost liquidity in the economy and help those in financial difficulty in the short-term.
Citizens will also receive ‘green checks’ to offset rising taxes on non-renewable energy. Adults will receive DKK1,300 and children DKK300.
The government expects the measures to increase economic activity by some 1.5% of GDP in 2010.
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