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Denmark: Potemkin Village

Mises Daily: Thursday, February 28, 2002 by


In the 1700s, the courtesans of Queen Catherine of Russia gave her tours along the Volga river where she witnessed a happy and thriving bourgeoisie living in clean and prosperous villages. But this was all a show to cover disease, poverty, and misery that lay just behind the facade that had been erected for her benefit.

This is the origin of the phrase Potemkin Village, a place where a politically generated appearance covers a less impressive underside.

Europe is today filled with Potemkin Villages, none as successful as Denmark. Denmark is often cited as an exemplary country within the EU, with an economic system that others should seek to emulate. In the comparisons of GDP per capita, Denmark ranks consistently in the top ten worldwide, and often in the top five.

Denmark's economic data for 2001 appear impressive:

  • Slow but balanced growth of 1.1 percent, down from 3.2 percent in 2000. Denmark has had higher growth than many other EU countries since the mid-1990s.           
  • An inflation rate of 2.3 percent. The inflation rate has not been above 3 percent since 1994 and not above 4 percent at all in the 1990s.          
  • The long-term interest rate (10-year) has shown a steady decline from a level in 1990 of more than 10 per cent to today's of just around 5 percent.          
  • The short-term interest rate (3-month) likewise has shown a steady and even bigger decline over the period. From 12 per cent in 1990 to just around 3.5 percent today.       
  • An unemployment rate that is relatively low and falling. The rate is now officially 5.2 percent, down from 12.2 percent in 1993.           
  • A budget surplus of 1.9 percent of GDP. It is the 5th year in a row that the budget has been in surplus.           
  • A fairly large surplus on the current account of 3.4 percent of GDP. Denmark has had a surplus on the current account continuously in the 1990s, except for 1998.           
  • The Danish public debt as a percentage of the GDP has fallen for several years and is now approximately 45 percent instead of close to 80 percent in the early 1990s.           
  • The Danish foreign public debt as a percentage of the GDP is also falling and is now approximately 15 percent instead of almost 40 percent in the early 1990s.           
  • Denmark is the least corrupt country in the world according to surveys that measure such things.           
  • Denmark also claims to have a population with a very robust work ethic, which is probably true. All of this looks very good, at least on the surface.

But let us look at some other economic statistics that are not mentioned nearly as often.

Denmark has an entire population of 5,350,000 people. Of them, 1,150,000 are below 18 years old. Of the remaining 4,200,000 people, 2,214,000 people receive government transfer payments (not counting 260,000 students that receive public scholarships of $550 per month).

When you recalculate these 2,214,000 people, of whom some receive only part-time government transfers, into people who live full-time on transfer income, the total becomes 1,590,000 people living off transfer payments.

Out of these 1,590,000 people, 710,000 are pensioners and the remaining approximately 900,000 are working-age people. Most of them cannot be found in the unemployment statistics. They are on other kinds of public transfer programs of which there exist ten different types.

There are approximately 1,900,000 people working in the private sector and 840,000 working in the public sector or publicly owned companies. (The reason the numbers do not add up to 4.2 million is because not all are full time workers.)

We can conclude from this that of the people in the working age of 18 to 66, more than one quarter live passively on government transfers (full time).  For every 100 persons employed full time in 1999, there were 33 working-age people receiving support. Adding pensioners, the total number was 61 people on full time transfer income for each 100 full time employed persons. (The pensioners are financed by a pay-as-you-go pension scheme). And out of those who are employed, 31.5 percent work for the government. 

All of this, of course, needs to be financed. Denmark has therefore for many years had a very high and continuously increasing tax level.

In 2002, the lowest marginal income tax level is 44.31 percent, then it increases to 49.77 percent and 63.33 percent. Forty percent of the working people pay the top marginal tax rate of 63.33 percent, which applies to all income over $33,000.

There are very few tax deductions available, and the tax value of the tax deductions is continuously being reduced.

A sales tax of 25 percent hits just about everything.

The capital gains tax is 59.7 percent for a private person in the high income tax bracket, unless you hold your investment for more than 3 years. It then falls to 44.8 percent.

There are additional taxes on "sinful" and "luxury" products likes cigarettes, alcohol, candy, soft drinks, electronic goods, and other luxuries.

For cars, there is a 180 percent special tax on top of the sales tax of 25 percent. Then there is a registration fee and a weight fee to be paid twice per year for the privilege of using the roads. The price of gasoline is nearly three times as high as it is in the US.

Denmark imposes many new green taxes. These are the taxes that have increased most substantially during the 1990s. These taxes hit heating, electricity, water, and gasoline.

Real estate, which is already heavily taxed, has been the target of new taxes throughout the 1990s. In addition, the tax value of deductions have been continuously reduced. 

With Denmark, as with all of Europe, your perception of its economic status depends on which statistics you are looking at. Also, your judgement of its economic status depends on your preferences (is stability alone to be valued, or is freedom also important?) and your time horizon (does it matter that all these taxes make Denmark far less prosperous than it otherwise would be?).

Danish politicians proudly proclaims that Denmark is the most egalitarian country in the world. They may be right. The obsession with equality delivers a crushing, daily blow to anyone with a new idea or the inkling to cultivate an ability that surpasses the norm. Young people have virtually no chance to improve their lot in life, to take risks, to make it big through innovation and entrepreneurship.

Excellent and hard work are not rewarded by a system that systematically levels the population into a huge homogenous middle class, whose standard of living advances only incrementally and in ways that flout economic priorities. A total tax level that approaches 70 percent is a relentless and debilitating reminder that this country desires no personal economic achievement and no accumulation of wealth.

And yet many people seem to be happy with this system, somewhat like the masses of Huxley's Brave New World. Of course it sets up a dynamic that harms everyone in the long run, but people don't seem to understand or care about this. Equality and stability are regarded as more important than progress and freedom.

A heritage of honesty and hard work are marvelous tools for papering over the failures of welfarism and subtle servitude. With the right attitude, even a prison population can settle into a comfortable and egalitarian existence, one that might even impress Queen Catherine passing by on a boat. But lacking energy, enterprise, entrepreneurship, and freedom, such systems of economic control exact a huge toll with the passage of time.

Per Henrik Hansen works at Danmarks Nationalbank and teaches economics at the Copenhagen Business School. Send him .