Tale afholdt ved den årlige samling i The Mont Pelerin Society
“Even after this tax reform, there will still be capitalists left in Denmark.”
- Mogens Lykketoft, former Minister for Finance of Denmark, after proposing a significant increase in taxation in the early 2000s.
The above written statement was made by the former leader of the Danish Social Democrats, Mogens Lykketoft, Minister for Finance 1993-2000 and the ideological architect of this political party, as he proposed a particularly aggressive increase in taxation some years ago (which was never passed into law as he was in opposition at the time), placing additional heavy burdens on businesses, upper middle class and wealthy individuals. It is very telling on the rather devious approach to capitalism in a country like Denmark and consistent with this influential politician’s view that we as a society must fundamentally change our focus from creating growth and move towards “not less state, but more state”.
Denmark has the highest total tax pressure in the world and is towering far above the European average. It also has the smallest private sector in Europe, to support one of the biggest public sectors. Add to that a generous entitlement system allowing unemployed and unemployable citizens an income well above that achieved by full time employees in the private sector in many European countries, and you will observe a need for tax revenues nearly unmatched anywhere else in the world.
The majority of Danish politicians intuitively understand that – regrettably, in the view of many of them – capitalists are an unpleasant necessity to generate the necessary revenues to fund the social welfare state and the myriad of responsibilities it takes on. Nothing is too small to attract the attention of Danish politicians and nothing to insignificant to attempt to regulate it. And the answer is almost invariably to throw more money at the problem, or hire more public servants to regulate and supervise it.
This is not surprising, as in a country where everyone is entitled to some kind of government assistance and rather cynically pursues their fair share of it, many citizens tend to supervise each other, to detect any kind of unwanted abuse of the social welfare system or any kind of unregulated and possibly untaxed commercial activity. There are now hotlines for citizens to report each other for abuse of social welfare, unemployment fraud, moonlighting and tax evasion. The Danish tax authorities do not accept non-electronic payments in excess of DKK10,000 (USD1,660) between citizens and businesses, and lays the responsibility of possible tax evasion on the purchaser of services, rather than only the party guilty of such evasion. Danish tax authorities can enter and investigate activities on private properties without a court order, if they detect signs of building activity or other commercial activities. Intriguingly, it requires much firmer legal ground to investigate a terrorist suspect than an average Danish citizen for potential tax evasion.
This increasing supervision and monitoring of all activities creates an atmosphere of distrust and suspicion between citizens and business people. It is a commonly held view among Danes that to become wealthy and successful in Danish business, you must almost certainly have been breaking or at least bending the rules in some way.
So being a capitalist in a social welfare state means extreme supervision, a general scepticism and mistrust from your fellow citizens – and a feeling that most politicians are looking for the exact point of pain where maximum tax can be extracted – not to avoid harming business and growth but to avoid pushing you so hard that you choose to leave the country, close down your activities and transfer the jobs abroad. This incidentally, is obstructed through exit taxation (often of unrealized and theoretical profits), to the point that Denmark has been taken to the European courts several times in connection with these obstructions’ impact the free movement of labour within the EU.
The Danish parliament is nearly devoid of people with practical experience from private sector activity. Several centrally important ministers have never held a job outside political parties and organisations, including the 27 year old Thor Möger Petersen, Minister for Taxation from the Socialist People’s Party (who did not get elected to parliament but selected for this obviously very important post, anyway), and the 28 year old MP, Astrid Krag, Minister for Health and Prevention also from the Socialist People’s Party (who started her new job by going on maternity leave immediately after being appointed). Other interesting choices include the former leader of the now defunct Communist Party of Denmark, Ole Sohn, being selected for Minister of Business and Growth. In fact, only three out of 23 ministers have any noticeable practical experience in the private sector, and then mostly as low level employees. It should be noted that the former centre right government that was in power for ten years between 2001 and 2011, did not score that much better on the business experience measure.
So how did they get elected?
Well clearly, the Danish voters do not value business or business experience very highly. This is understandable as more than half of the adult population is either working in the public sector or living on some form of social transfer payment. These payments have a much higher proportion than in countries that are otherwise very comparable on many parametres to Denmark, such as Sweden, Norway or Finland.
Out of a total population of 5.6m, approximately one million are under 15 years of age. A little more than 2m are pensioners, unemployed, sick or on social transfer payments for other reasons. Around 800,000 are employed in the public sector. This leaves around 1.8m Danes that are not directly dependent on state payments in some shape or form. But even among this group, there is high focus on cheap, subsidised child care, free health care, child bonus payments, subsidised housing and an infinite number of other ways to secure some additional income from the state.
At the other extreme, only 28,000 Danes have an annual income in excess of DKK1m (USD166,000). Not surprisingly, more politicians cater to the 2.6m voters dependent on the state for their livelihood, than to the 28,000 hard working individuals making a good annual income. Therefore, attempts to highlight the risks of brain drain by taxing such incomes more aggressively, are regularly dismissed by socialist parties as a scare tactic. In fact, it is generally accepted by most politicians that there is no such thing as “dynamic effects” from tax policies, meaning that any suggestion to lower taxes in order to promote growth must – in order to be taken seriously – be fully financed dollar for dollar by other initiatives. This of course could be beneficial if such thinking led to reduced public sector expenditure, but unfortunately, it normally leads to a continuous moving up and down of different tax rates to compensate lost revenues on one tax, with new revenues from other taxes. The most recent “tax reform”, just finalised by a broad coalition of parties, did in fact reduce some income taxes at the lower end of the spectrum marginally, but was to a significant extent replaced by new industry taxes on banks, and general increases of a different a number of taxes on alcohol, cigarettes, fat and sweets etc that apart from being difficult burdens for certain industries drive a substantial part of consumer shopping for daily necessities across the border to Germany and Sweden that have much lower taxes on these types of products.
While no serious reforms are or apparently will be undertaken in the current environment, both voters and politicians like to create the illusion of reforms and security, as eloquently described by Danish business man, Asger Aamund. Of course, many citizens sense that the current system is if not completely unsustainable, at least threatened (by what is perceived as mostly external causes, as there is little desire or political will to look at the more obvious internal causes). So a lot of time and political posturing is revolving around pretending to be involved in deep and difficult negotiations about wide-reaching decisions and reforms, but reality is that this is fundamentally an illusion intended to create a feeling of actually dealing with issues the country faces, and reassuring voters that the current system can be upheld without any serious cutback, sacrifices or changes.
In total, this particular reform shifted around 0.7% of the Danish GDP, and is centred around a broad agreement to continuously target 0.8% growth in the public sector, that is already the largest in the world. Only two parties did not participate in this reform – The Liberal Alliance, advocating reductions in the public sector as the only party in the country, and currently supported by less than 5% of the voters and Enhedslisten, a coalition of former communists and other extreme left wing parties that wants the public sector to grow much faster. In recent months, this extreme left party - which at the 2011 election promised to support the current centre-left government – has suggested minimum payments to students of DKK15,000 (USD2,500) per month, the introduction of a wealth tax, a tax on “millionaires”, meaning people earning from around USD166,000 upwards, a financial transaction tax, and has a party programme that officially promotes abolishing the police and military, as well as nationalising the banking sector and big Danish companies like LEGO and Maersk Shipping. From being a marginal party for many years, it gained more than 6% of the vote in 2011 and has propelled as high as 13% in recent opinion polls, as the government has failed to deliver on its more extreme socialistic pre-election promises.
The recent rise of the extreme socialists that continue handing out promises of huge public expenditures combined with the broadly supported tax reform going nowhere in terms of really moving the dial between public and private sectors, highlights the fundamental challenges of a social welfare society, and the extreme vulnerability of business and capitalism operating within it.
As is evident from the data above, in order to undertake a truly business friendly policy, promoting capitalism and growth, one would need to gain the support of an overwhelming majority that in the short term would have to accept lower taxation, lower public expenditure and a cut back on many of their perceived rights and entitlements. The risk of a predictable negative reaction to such policies has kept Denmark in a stale mate for more than four decades since the social welfare system really had gotten hold of society.
The new confrontation line today stands between recipients of social welfare (and public sector academics) and people involved in productive activity are very clear from voting patterns of blue collar workers. From the earlier historical support of the left, today's Danish blue collar workers vote for the centre-right parties by a remarkable 68 pct to 32 pct margin. While that clearly indicates that the centre-left is no longer seen to represent their traditional constituency, blue collar workers, it must also be seen as a dilution of the centre-right. Even though most workers are disappointed with the left, they are not likely to be strong supporters of free markets and capitalism.
This has not always been the case – in 1960, Denmark had roughly the same tax pressure (25 pct) as Switzerland and significantly below the US (28 pct) and the UK (33 pct), and a moderately sized public sector. Denmark had a small, hard-working population for whom their values and self understanding placed taking responsibility for their own welfare very high. However, since 1960, the tax pressure has doubled, and increased in a way rather unlike comparable nations.
There has been a broad consensus developing in recent years between the “centre-left” and the “centre-right”, which means that the main difference is the rhetoric. There is very little practical difference in the policies pursued, and no real disagreement in the willingness to continue to let the public sector grow, while regulating and taxing the private sector ever more. The 2001-2011 “centre-right” government deliberately and officially played down the economic policies to pursue a more “value orientated” strategy. In other words, it wished to make the Danes more liberalistic and less socialistic. Not surprisingly, when the economic policy pursued does not support the value policy, the outcome is unlikely to be desired, and it must have been with some consternation that the centre-right found itself not only replaced in 2011, but also had to recognise a complete failure in their stated objective – to make Danes less socialistic and more liberalistic/capitalistic. Since 2001 there has been a very noticeable swing from “right” to “left”, with the latter having taking a significant lead.
Hence, no political party of any magnitude and with any serious expectations of being elected to govern today will have any real incentive or courage to challenge the status quo, or to run on a platform of significant changes to the centrist-social democratic consensus currently holding power. This means that real reform seems out of question for the time being. It is clear for most, that the long term economic sustainability of the highly praised “Scandinavian model” is not realistic. But of course, in a world where most other Western societies seem to be on equally unsustainable paths, this may be less obvious rather than more.
It is also clear that when reforms are not forthcoming, a further increase in the unhealthy ratio between private and public sector employment and simply employed/not employed will continue. Pure demographics make this very obvious. If we look at very basic age demographics, the ratio between employed people and people over 60 years of age was 5 to 1 in 1950, today it is only 3 to 1, and in 2040 it will be 2 to 1. On top of that, the proportion of people older than 80, implying substantially increased health care costs will explode. Taking into account the many other issues stated above, the demographic developments will be a monumental challenge.
At the same, Denmark is getting more and more uncompetitive, and the brain drain is gathering momentum. This is very likely to mean even more burdens on a stagnant or even decreasing group of people involved in productive activity – leading to higher taxes, more capital and jobs leaving the country, combined with public sector cutbacks and severe austerity with predictable civil unrest as a result.
This is all common, but unpopular, knowledge among leading politicians. The very clear message inherent in the centre-left is losing votes and trust over less than 12 months since the last election to an irresponsible extreme left wing message which is not lost on anyone.
Equally, while the only true, so-called “right wing” party, Liberal Alliance promoting lower taxes and public sector reductions did manage to get into parliament at the last election with 5% of the vote, it seems challenging for the party to move much higher than that level, as it is widely viewed as seeking to dismantle the welfare state. This impression persists, and is actively promoted by even other centre-right parties, although full implementation of the party’s proposals would only marginally lower the tax pressure and still keep the size of the country’s public sector well above EU average.
So is there really any hope for reforms, rationality, courage and capitalism in a welfare society? The answer is probably not, but some neighbouring countries have pursued more responsible policies in recent years, notably Sweden and Finland. In a benchmarking of best practice, both countries have a more efficient use of money in the public sector, better value for money in education and health care, fewer persons permanently placed on social welfare and a more friendly rhetoric towards business, growth and job creation. Both of these countries must be considered traditional social welfare states, but at least show some degree of moderation in their socialist practices. Of course, one could learn much more from countries such as Switzerland with a much smaller, but better public sector, as well as the growth experienced in Singapore and other countries outside of Scandinavia, but here, the very negative perception among the Danish population of significantly differently structured states makes it difficult to promote best practices stemming from outside of our nearest neighbours.
The other opportunity for Denmark is that the smaller political parties that do not see their main goal as being in government can more freely promote more radical views, and through pointing out specific examples can impact the political debate more than their voter support perhaps would indicate.
A good recent example was that an MP for Liberal Alliance, Joachim B. Olsen through a rather random comment on Facebook ended up in an extremely public argument with a socialist politician, Özlem Cekic. The latter claimed that many people were very poor in Denmark and “the rich” were not contributing enough. She then offered to present a poor person as an example for a debate. The resulting presentation of a lady, that is now ridiculed by much of the Danish population as “Carina The Pauper” shocked people on all sides of the spectre by presenting her budget showing that she (the intended perfect example of a poor an unfairly treated person in a social welfare society) in 20 years, without any obvious conditions preventing her having full employment, has received more than DKK15,700 (USD2,600) after tax per month, and had around DKK 5,000 (USD 850) per month left over for personal use after paying for “fixed costs” that included (judging from the TV pictures very comfortable) accommodation, dog food (sic!), cigarettes, TV package subscription, internet, phone and her son’s football coaching. A substantial number of full time employees actually realised for the first time that they had the same amount or even less left for themselves after heavy taxation, and that on top of this, “Carina The Pauper” complained bitterly about how the Danish society mistreated and exploited her, while accepting their hard earned money.
That kind of eye opener was shocking to most Danes, and has acted as a way to break the otherwise widespread taboo of recognising that the system is overly generous and often abused by ungrateful and undeserving recipients. In fact, widely seen as “the political own goal of the decade” of the socialists, it led to for the first time in decades removing the automatic regulation of certain transfer payments to follow wage inflation, something that was far beyond even the former centre-right government’s courage, and basically unthinkable a year earlier. Just one story, one example, in this case fundamentally changed at least one of the most dangerous pillars of the social welfare state – that social transfer payments automatically follow wage rises, thereby never really incentivising the unemployed to improve their situation. So an impact is obviously possible, and there have been other such examples, although this is the most widely influential.
Clearly the extreme left can also benefit from the same effect by not being in government and probably do so to an even stronger degree, at least in voter support if not in real impact. So there is a very long way to reverse what essentially is an entitlement society, with extensive positive rights of support and victimisation, rather than negative personal rights of freedom, security, privacy and ownership.
Can capitalism exist or co-exist in the long-term in a social welfare state? Essentially, the answer has to be no. If the social welfare state is rolled back to a reasonable size, and capitalism is set free to create both the foundation for private wealth and public welfare, the society would not any longer qualify for the Scandinavian interpretation, where equality not just of opportunity, but also of outcome is an important ideological component.
Logically, in an entitlement society, individualism is replaced by “sharing” and the two things are contradictory in terms in their extreme forms. The dynamic created in the entitlement society is very hard to reverse and seems to lead towards a negation of true democracy that must include limits for the dictatorial power of the majority. Furthermore, the definition of welfare is not clear. 100 people will have 100 different definitions – and very often a definition that is of particular benefit to themselves or their social group. A “free” product, or “free” service left undefined will in itself create more drift and expansion, and also create increasing competition, control needs and mistrust between the different recipients.
Similarly the strong opposites of micro versus macro is working against the successful co-existence of capitalism and the social welfare state. Capitalism is essentially “micro” – creating continuous small innovations, improvements, new knowledge, new services and thereby continuous wealth creation. The State is “macro” – creating inefficient redistribution, ruining beneficial market forces and attempting unsuccessful “smoothening out” of business cycles, all destructive of capitalist wealth creation. Essentially, the EU crisis - which is more threatening to capitalism and freedom than anything else in decades - is created by “macro” activity, creating unheard of, unearned and unfunded entitlements that now lead to dramatic attacks on the free market and the creative and self-correcting process that capitalism is.
Another major problem is the effect on the labour markets of states with big public sectors and generous social transfer payments. It is very difficult in such countries to create efficient service sectors, as working in the service sector comes to be seen as humiliating by the individuals delivering the services. And as it is far too simple to fall back on the social welfare system, service sectors in a country like Denmark are dramatically underdeveloped, meaning that there is little employment to be found for less resourceful citizens. And this again forces them into the social welfare system.
The large and growing number of public employees drives the cost of doing business to higher and unacceptable levels over time. Downsizing and flexibility in economic downturns and according to business cycles is largely non-existent, meaning that the private sector both has to pay higher taxes and suffer from lack of availability of a sufficiently large and flexible labour force.
Public-private partnership, the buzz word of the day in social welfare societies, is in effect only available for larger firms and often operates in an ethical grey zone as very few firms can really compete efficiently due to complex rules and procedures. This minimises the innovative impact from smaller and more flexible firms and creates an uncomfortable environment where fat profit margins are available for preferred firms and industries while others are entirely excluded.
A social welfare society that wants to embrace and benefit from some form of real capitalism in the long run will need to set very stringent parameters for the amount of welfare available to its citizens as a percentage of GDP, as well as a maximum limit for taxation and government debt levels, and should furthermore secure strong fundamental incentivisation principles written into a constitution and secure basic negative rights for its individual citizens. It needs to embrace a different rhetoric and give up on equality of outcome as a key objective. It needs to welcome, encourage and praise large contributors to the economy rather than vilify them and berate them for populist purposes. It needs to demand responsibility from the citizens for their own economic situation and be very firm on abuse or exploitation of public support or services. It needs to stop victimising large groups of the society and stop pricing them out of employment through minimum wages and similar initiatives. It needs to stop its politicians corrupting the democratic process through bribing particular voter groups to gain power.
In other words, it probably has to cease being a social welfare state at least in the Scandinavian definition. On the evidence, one has to be of an optimistic nature to foresee such a positive resolution to the inherent contradiction between capitalism and the modern social welfare state.
Perhaps the quote, sometimes attributed to Alexander Fraser Tytler, but probably of younger and unknown origin, is after all a better prediction:
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."
