Consider adapting Danish policy choices for U.S.? Centrists and conservatives say 'yes'
Oct. 5, 2011 — To judge by the absence of mainstream press and political discussion in the United States about the kinds of public policy choices that Denmark has made — including the creation and maintenance of a robust welfare state supported by business interests, the rejection of a low-wage model, and the influence of an interconnected series of social institutions that foster a sense of active citizenship — the Danish model is about as relevant to the U.S. as an experiment on Mars.
the denmark series
This is the concluding article in our series on the distinctive public policy choices made by Denmark. It focuses on how some conservatives and centrists are troubled by the failure of policy makers in the U.S. to consider how those choices might usefully be adapted here. Make sure to read the previous articles in the series: Part 1: Business interests lauding the welfare state? Part 2: The high road to high wages: Denmark’s answer to the U.S. model Part 3: Being a citizen, Danish style.
— Editor
But when Remapping Debate recently spoke with several centrist and conservative U.S.-based economists and policy experts, it turned out that many agreed that the Danish experience may offer some valuable lessons for the United States. Though many of them were dubious about the wholesale “exportability” of the Danish model, most were willing to discuss seriously specific Danish policy choices that, they believe, may offer valuable lessons for American policy makers.
And they all agreed on another important point: the discussion of policy options in the United States is becoming increasingly circumscribed, effectively excluding options that —regardless of their effectiveness or desirability — fall outside the realm of what is considered “feasible.”
“One can disagree with the general thrust of a what a country is doing,” said David Mitchell, a senior fellow at the libertarian-oriented Cato Institute, “but we should never let that prevent us from looking to see if any specific policies are working and if they might be adapted.”
Tax policy
Tax policy is one of the primary areas where Denmark’s choices challenge predominant political dogma in the United States. Denmark imposes (by some measures) the highest tax burden in the Organization of Economic Cooperation and Development (OECD), with tax revenues approaching 50 percent of gross domestic product (the United States collects 24 percent of GDP in tax revenues, one of the lowest rates in the OECD). But Denmark’s relatively high tax rates have not translated into poor economic performance. Though the average Danish worker makes slightly less than the average American worker, he or she also works fewer hours and is provided substantially more services through the Danish welfare state. The unemployment rate in Denmark has been consistently lower than the U.S. unemployment rate for more than a decade, while average rate of annual growth in GDP per capita has rivaled the United States for decades.
Many conservatives have long been aware of these statistics: “The Scandinavians show that you don’t have to have a terrible economy if you have a big welfare state and high taxes,” Kevin Hassett, a senior fellow at the American Enterprise Institute, a conservative think-tank, said several years ago.
Jacob Kierkegaard, an economist at the centrist Peterson Institute for International Economics, agreed with that statement, though he added that the top marginal income tax rates in Denmark, at 63 percent, has probably had a stifling effect on growth (the top U.S. marginal income tax rate is currently 35 percent).
“I think they would do well to lower that to about 50 percent,” he said, “but flipping that around to the U.S., I don’t believe that anything that has been discussed in recent years in terms of tax increases is going to have any crippling effect whatsoever.”
Others, however, remained unmoved. Bryan Caplan, a conservative economist at George Mason University, conceded that the Danish economy is in relatively good shape, despite its high tax rates. “But you always have to ask what it could have been,” he added.
Though he said that it is difficult to estimate what Denmark’s growth could have been had their tax rates been lower, Caplan said that the Danes were probably accepting a tradeoff between higher economic growth rates and the social programs that are financed by those high taxes, particularly the free, universal health care and higher education systems, which are two of the most expensive — and most popular — parts of the Danish welfare state.
“That’s not the decision I would make, but it seems to work fine for them,” Caplan said.
Kierkegaard suggested that Danish tax policy may also offer some lessons in connection with the potential elimination of long-sacrosanct tax deductions. For example, he said, the Danes phased out their version of the mortgage-interest deduction in the 1990s, a policy that was generally considered successful. The mortgage-interest deduction allows taxpayers to deduct the amount of interest they have paid on a home loan from their overall taxable income. In the United States, the mortgage interest deduction is the third most expensive tax expenditure, costing the government about $80 billion in 2009. And despite acknowledgment by a wide range of authorities — from the conservative Tax Foundation to the International Monetary Fund — that this policy overwhelmingly benefits wealthy families, American policy makers have been hesitant to tinker with the deduction.
“The Danes show that you can phase out something like that without causing huge problems,” Kierkegaard said. The tax revenue that the Danish government regained from phasing out the provision has “been channeled into more productive investments, especially in infrastructure,” and has also lessened Denmark’s vulnerability to housing bubbles, he added.