The Free Enterprise Welfare State: A History of Denmark’s Unique Economic Model
25 October 2023
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18 October 2023
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https://iea.org.uk/wp-content/uploads/2023/12/free-enterprise-welfare-state-history-of-denmarks-unique-economic-model.pdf
Despite common misperceptions, middle-class workers in Denmark pay relatively high taxes for Denmark’s large government.
Indeed, Denmark has a large welfare state paid for by some of the highest personal income and consumption taxes in the industrialized world.
For example, when they buy goods (e.g. groceries) and services, Danes pay a 25 per cent value-added tax (VAT), similar to Canada’s GST, which is the second-highest among high-income countries.
And Denmark’s top personal income tax rate (57 per cent), which is among the highest in the world, kicks in at a comparatively low level of income—roughly US$91,500 compared to US$176,672 in Canada and US$536,000 in the United States. In other words, it’s not just wealthy Danes who pay the top personal income tax rate.
Finally, according to polling data released in 2023, Canadians overwhelmingly reject higher personal income taxes for the middle class and a higher GST to finance higher levels of government spending.
The Free Enterprise Welfare State: A History of Denmark’s Unique Economic Model examines the Danish economic model, including its origins, and draw some important lessons from the experience, including how economic freedom underlies the high standards of living Danes enjoy, how its welfare state is financed with very high taxes on middle-income workers, and how Denmark’s experiment with unsustainably large government did not go well and had to be (largely) undone.
Over the past 150 years, Denmark has largely been an economic success story as a result of its steadfast dedication to free markets, free trade, and private property rights dating back to the 1850s. However, the country has had some major policy setbacks, most notably the major macroeconomic policy mistakes of the 1970s when an explosion of government spending contributed to rapidly increasing wages, serious structural unemployment, relatively rapid price increases, and a balance of payments crisis.
This chapter examines Denmark’s public finances and tax system, and identifies why the country has been able to spend and redistribute at high levels, while at the same time maintaining relatively sound public finances. The chapter also seeks to identify the reasons for Denmark’s long-standing fiscal conservativism.
This chapter provides a brief overview of the key features and relative performance of Denmark’s health care system, including its use of private insurance and private for-profit care providers, and how Denmark compares to other high-income countries that also provide universally accessible health care.
This chapter provides an overview of Denmark’s primary and lower secondary education system, its organization, administration, and relative school performance, with additional focus on Denmark’s diverse independent (privately operated) schools.
The income support system in Denmark offers some of the most generous benefits among advanced countries around the world, but it is also one of the most expensive to administer. This chapter examines the system in detail: what it covers, how it’s funded, and how some unique—notably private occupational pensions—allow Danes to have among the highest retirement incomes in the OECD and relatively few poor pensioners.
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Lars Christensen is an internationally renowned Danish economist specialising in the international economy, emerging markets and monetary policy. Lars has over 25 years of experience in government and banking and is the founder and CEO of Markets & Money Advisory and is a senior fellow at the United Kingdom’s Adam Smith Institute and an Associate Professor at the Copenhagen Business School. Lars worked for five years as an economic policy analyst at the Danish Ministry of Economic Affairs (1996-2001) and has been head of Emerging Markets research at Danske Bank (2000-2015). He has a master degree in Economics from the University of Copenhagen (1994).
Matthew D. Mitchell is a senior fellow in the Centre for Economic Freedom at the Fraser Institute. Prior to joining the Institute Mitchell was a long-serving senior fellow at the Mercatus Center at George Mason University, where he remains an affiliated senior scholar. He is also a senior research fellow at the Knee Center at West Virginia University. Mitchell received his PhD and MA in economics from George Mason University. His writing and research focus on economic freedom, public choice economics, and the economics of government favouritism. He is also the co-author of two additional books in the Realities of Socialism series, The Road to Socialism and Back: An Economic History of Poland, as well as The Road to Freedom: Estonia’s Rise from Soviet Vassal State to One of the Freest Nations on Earth.
Bacchus Barua is director of the Fraser Institute’s Centre for Health Policy Studies. He completed his BA (Honours) in Economics at the University of Delhi (Ramjas College) and received an MA in Economics from Simon Fraser University. Bacchus has conducted research on a range of key health care topics including hospital performance, access to new pharmaceuticals, the impact of aging on health care expenditures, and international comparisons of health care systems. He also designed the Provincial Healthcare Index (2013) and is the lead author of The Effect of Wait Times on Mortality in Canada, and Waiting Your Turn: Wait Times for Health Care in Canada (2010–2014).
Jake Fuss is director of Fiscal Studies for the Fraser Institute. He holds a Bachelor of Commerce and a Master’s Degree in Public Policy from the University of Calgary. Jake has written commentaries appearing in major Canadian newspapers including the Globe and Mail, Toronto Sun, and National Post. His research covers a wide range of policy issues including government spending, debt, taxation, labour policy, and charitable giving.
Paige MacPherson is associate director of Education Policy for the Fraser Institute. Paige has contributed policy analysis and commentary to major media outlets and research organizations across Canada for many years, focusing on education policy, fiscal policy and government accountability. She holds a Master of Public Policy from the University of Calgary, and a BA from Dalhousie University. Prior to joining the Fraser Institute, Paige was Alberta director and Atlantic director for the Canadian Taxpayers Federation, TV host and politics reporter with Sun Media and provided communications for the Atlantic Institute for Market Studies, where she founded a post-secondary student outreach program.
Mackenzie Moir is a policy analyst at the Fraser Institute. He holds a Bachelor of Science in Nursing from York University and a Master of Science in Health Policy and Research from the University of Alberta. Mackenzie has previous clinical experience and has provided direct care in general medicine, palliative care, cardiology, oncology, and neurology settings. In addition to several academic publications, his commentaries have appeared in University Affairs, the Financial Post, and Globe and Mail. His research focuses on the performance of health-care systems, patient choice, and health-related quality of life.
Steven Globerman is a senior fellow and chair of the Addington Centre in Measurement at the Fraser Institute. Previously, he held tenured appointments at Simon Fraser University and York University and has been a visiting professor at the University of California, University of British Columbia, Stockholm School of Economics, Copenhagen School of Business, and the Helsinki School of Economics. He has published more than 200 articles and monographs and is the author of the book The Impacts of 9/11 on Canada-U.S. Trade as well as a textbook on international business management. In the early 1990s, he was responsible for coordinating Fraser Institute research on the North American Free Trade Agreement. He earned his BA in economics from Brooklyn College, his MA from the University of California, Los Angeles, and his PhD from New York University.
The Realities of Socialism is a multimedia project—a collaboration between organizations in Canada, Australia, the United States and United Kingdom—to educate people about the experiences of socialism that was imposed on tens of millions of people across the world throughout the 20th century. Here you will find data-driven videos, infographics, short videos and informative studies about socialism’s history in Poland and Estonia, Sweden and Denmark’s short experiment with socialism, and Singapore’s unique approach.
Introduction
Despite common misperceptions, middle-class workers in Denmark pay relatively high taxes for Denmark’s large government.
Indeed, Denmark has a large welfare state paid for by some of the highest personal income and consumption taxes in the industrialized world.
For example, when they buy goods (e.g. groceries) and services, Danes pay a 25 per cent value-added tax (VAT), similar to Canada’s GST, which is the second-highest among high-income countries.
And Denmark’s top personal income tax rate (57 per cent), which is among the highest in the world, kicks in at a comparatively low level of income—roughly US$91,500 compared to US$176,672 in Canada and US$536,000 in the United States. In other words, it’s not just wealthy Danes who pay the top personal income tax rate.
Finally, according to polling data released in 2023, Canadians overwhelmingly reject higher personal income taxes for the middle class and a higher GST to finance higher levels of government spending.
The Free Enterprise Welfare State: A History of Denmark’s Unique Economic Model examines the Danish economic model, including its origins, and draw some important lessons from the experience, including how economic freedom underlies the high standards of living Danes enjoy, how its welfare state is financed with very high taxes on middle-income workers, and how Denmark’s experiment with unsustainably large government did not go well and had to be (largely) undone.
Chapters
Chapter 1: Getting Rich Before Becoming A Welfare State
Over the past 150 years, Denmark has largely been an economic success story as a result of its steadfast dedication to free markets, free trade, and private property rights dating back to the 1850s. However, the country has had some major policy setbacks, most notably the major macroeconomic policy mistakes of the 1970s when an explosion of government spending contributed to rapidly increasing wages, serious structural unemployment, relatively rapid price increases, and a balance of payments crisis.
Chapter 2: The Evolution of Denmark’s Distinct Fiscal System
This chapter examines Denmark’s public finances and tax system, and identifies why the country has been able to spend and redistribute at high levels, while at the same time maintaining relatively sound public finances. The chapter also seeks to identify the reasons for Denmark’s long-standing fiscal conservativism.
Chapter 3: The Danish Health Care System—Policy and Performance
This chapter provides a brief overview of the key features and relative performance of Denmark’s health care system, including its use of private insurance and private for-profit care providers, and how Denmark compares to other high-income countries that also provide universally accessible health care.
Chapter 4: Denmark’s Primary and Lower Secondary Education System—Organization, Funding, Performance, and the Motivating Effect of School Choice
This chapter provides an overview of Denmark’s primary and lower secondary education system, its organization, administration, and relative school performance, with additional focus on Denmark’s diverse independent (privately operated) schools.
Chapter 5: Generous and Expensive—An Overview of Denmark’s Income Support System
The income support system in Denmark offers some of the most generous benefits among advanced countries around the world, but it is also one of the most expensive to administer. This chapter examines the system in detail: what it covers, how it’s funded, and how some unique—notably private occupational pensions—allow Danes to have among the highest retirement incomes in the OECD and relatively few poor pensioners.
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About the Contributors
Lars Christensen is an internationally renowned Danish economist specialising in the international economy, emerging markets and monetary policy. Lars has over 25 years of experience in government and banking and is the founder and CEO of Markets & Money Advisory and is a senior fellow at the United Kingdom’s Adam Smith Institute and an Associate Professor at the Copenhagen Business School. Lars worked for five years as an economic policy analyst at the Danish Ministry of Economic Affairs (1996-2001) and has been head of Emerging Markets research at Danske Bank (2000-2015). He has a master degree in Economics from the University of Copenhagen (1994).
Matthew D. Mitchell is a senior fellow in the Centre for Economic Freedom at the Fraser Institute. Prior to joining the Institute Mitchell was a long-serving senior fellow at the Mercatus Center at George Mason University, where he remains an affiliated senior scholar. He is also a senior research fellow at the Knee Center at West Virginia University. Mitchell received his PhD and MA in economics from George Mason University. His writing and research focus on economic freedom, public choice economics, and the economics of government favouritism. He is also the co-author of two additional books in the Realities of Socialism series, The Road to Socialism and Back: An Economic History of Poland, as well as The Road to Freedom: Estonia’s Rise from Soviet Vassal State to One of the Freest Nations on Earth.
Bacchus Barua is director of the Fraser Institute’s Centre for Health Policy Studies. He completed his BA (Honours) in Economics at the University of Delhi (Ramjas College) and received an MA in Economics from Simon Fraser University. Bacchus has conducted research on a range of key health care topics including hospital performance, access to new pharmaceuticals, the impact of aging on health care expenditures, and international comparisons of health care systems. He also designed the Provincial Healthcare Index (2013) and is the lead author of The Effect of Wait Times on Mortality in Canada, and Waiting Your Turn: Wait Times for Health Care in Canada (2010–2014).
Jake Fuss is director of Fiscal Studies for the Fraser Institute. He holds a Bachelor of Commerce and a Master’s Degree in Public Policy from the University of Calgary. Jake has written commentaries appearing in major Canadian newspapers including the Globe and Mail, Toronto Sun, and National Post. His research covers a wide range of policy issues including government spending, debt, taxation, labour policy, and charitable giving.
Paige MacPherson is associate director of Education Policy for the Fraser Institute. Paige has contributed policy analysis and commentary to major media outlets and research organizations across Canada for many years, focusing on education policy, fiscal policy and government accountability. She holds a Master of Public Policy from the University of Calgary, and a BA from Dalhousie University. Prior to joining the Fraser Institute, Paige was Alberta director and Atlantic director for the Canadian Taxpayers Federation, TV host and politics reporter with Sun Media and provided communications for the Atlantic Institute for Market Studies, where she founded a post-secondary student outreach program.
Mackenzie Moir is a policy analyst at the Fraser Institute. He holds a Bachelor of Science in Nursing from York University and a Master of Science in Health Policy and Research from the University of Alberta. Mackenzie has previous clinical experience and has provided direct care in general medicine, palliative care, cardiology, oncology, and neurology settings. In addition to several academic publications, his commentaries have appeared in University Affairs, the Financial Post, and Globe and Mail. His research focuses on the performance of health-care systems, patient choice, and health-related quality of life.
Steven Globerman is a senior fellow and chair of the Addington Centre in Measurement at the Fraser Institute. Previously, he held tenured appointments at Simon Fraser University and York University and has been a visiting professor at the University of California, University of British Columbia, Stockholm School of Economics, Copenhagen School of Business, and the Helsinki School of Economics. He has published more than 200 articles and monographs and is the author of the book The Impacts of 9/11 on Canada-U.S. Trade as well as a textbook on international business management. In the early 1990s, he was responsible for coordinating Fraser Institute research on the North American Free Trade Agreement. He earned his BA in economics from Brooklyn College, his MA from the University of California, Los Angeles, and his PhD from New York University.
Realities of Socialism
The Realities of Socialism is a multimedia project—a collaboration between organizations in Canada, Australia, the United States and United Kingdom—to educate people about the experiences of socialism that was imposed on tens of millions of people across the world throughout the 20th century. Here you will find data-driven videos, infographics, short videos and informative studies about socialism’s history in Poland and Estonia, Sweden and Denmark’s short experiment with socialism, and Singapore’s unique approach.
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