Steve Forbes was in Denmark this week on a European tour, meeting with political and business leaders. His main message was that while Denmark has arguably the strongest economy in Europe right now, the high danish taxes are limiting our economic growth.
And danish taxes are very high: The highest tax bracket kicks in after only 40.000$ earned, and you pay 60% taxes on everything you earn over that. This money is used to finance a very high level of public services, including free health care, schools and universities for everybody.
The high tax level also finances what is called the danish flex-security model: In Denmark it’s relatively easy to fire employess (flexibility) but unemployed danes enjoy great benefits (security). Compare this to Sweden where it’s very, very difficult to lay employees off because the unions have enormous influence or to the US where unemployment benefits are not as generous.
Forbes argues that the economic success Denmark is currently enjoying comes in spite of the high tax levels, and said “just imagine what you could achieve with lower taxes.” His argument goes something like this:
- Because taxes are so high, working more doesn’t pay much, therefore people work less
- If taxes were lower (say 40% in the top bracket instead of 60%) people would work more
- People would also make more money, meaning the state would take in the same amount of money in taxes
- People working harder would result in increased economic growth
I think he’s wrong, wrong, wrong, and I’ll tell you why!
It follows from Forbes’ argument that danish employees and businesses must be supernaturally talented, able to create great results even when they’re shackled by the world’s highest taxes. And that consequently lowering those taxes would turn Denmark into a true monster of economic growth.
While this view is certainly flattering, it’s probably more reasonable to assume, that danish businesses and employees are on par with those found in other countries, and that the economy is doing so well not in spite of but because of those high danish taxes.
In fact, Forbes’ argument is representative of an old-skool view of work and economy that I feel sorely tempted to add to my list of vampire ideas. Here’s my rebuttal to each step:
1: Because taxes are so high, working more doesn’t pay much, therefore people work less
When taxes are very high, working simply for the pay-check is a bad bet. But let me tell you, danes still work their butt off when they enjoy their jobs. People working long hours only for the money are not good to have around. People who love their jobs are much more productive.
2: If taxes were lower people would work more
It’s true, people would work more. But would they achieve more? This story argues that it’s a little more complicated than that, and that more time at work does not necessarily mean that more work is being done.
Also, when people work too hard, they become less happy at work. Being less happy at work means that you’re less creative and more resistant to change. And if there’s one thing businesses need today it’s innovation and change-ability.
3: People would also make more money, meaning the state would take in the same amount of money in taxes
However, when people work more they also become more prone to stress, disease and depression, which increases public health expenses and costs businesses time and money.
4: People working harder would result in increased economic growth
When people work more, productivity plummets. You may have GDP growth in terms of people working more – but are they actually producing more? Here’s an alternate view.
Conclusion: It’s about the happiness, stupid!
The danish model, rather than hindering economic growth is more likely to be the source of it, for one simple reason: It promotes happiness at work. Working only for the pay doesn’t pay and unemployment benefits are pretty good, so why should you stick with a job you don’t like. And let me say this again: People are very rarely productive in jobs they don’t like. This frees employees to find a different job they DO like – and no-one is more productive than an employee who truly loves her job.
This also combines with a long-standing danish tradition of focusing on happiness at work as well as a modern, egalitarian leadership style to make the danes the happiest people at work according to a recent study. And in my opinion, that is the most imporant factor.
And on a more fundamental level: Why is economic growth a goal in itself? Why should this one parameter be a nation’s most important success factor?
British economist Richard Layard in his book Happiness, lessons from a new science argues that this approach is wrong and that it would be better to govern a nation in a way that maximizes its people’s happiness rather than GDP growth.
Layard’s book also clearly shows that the more people work (beyond a certain point), the less happy they are. Working more hours and earning more money makes people less happy – good health and spending time with friends and family makes people more happy.
This also consistently informs negotiations between unions and employees in Denmark. The consistent trend these last 10-15 years has been that employees have held out for more vacation time rather then raises.
Forbes’ plan would probably make more people work more. And they would make more money. They would also be less happy and more prone to stress, heart disease and depression. Which would cost society a lot of money.
Whereas people working sensible hours (as many Danes are today) tend to be happy, creative and innovative. Exactly the qualities a nation needs to succeed.