Tax competition

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tax-competition

Tax, it is often argued, is one of the most influential issues when it comes to determining a country's competitiveness. Included amongst the many reasons for this, is that low taxes help attract a better skilled workforce, thus generating higher productivity.

The suggestion that lower tax has a positive effect on a country's attractiveness for highly educated people is about to be proven in Denmark. From the first of January this year Denmark has implemented tax reform securing lower income taxes and cutting the highest marginal tax rate by about 10 percent. The Danish government has done this to make Denmark more attractive to highly skilled people in a climate of sharpened international competition.

In Denmark highly skilled people can sign a three year contract giving them a tax discount for those three years. The most common scenario in the past has been that people come to Denmark, have their three years of tax discount and then move on to another country . However, The Confederation of Danish Industries (DI) can already now report that since the reforms it has become easier for Danish companies to convince foreign staff to sign contracts for longer periods than those three years.

This is a good thing for Denmark, but there is a cloud on the horizon. There is much uncertainty about the opposition’s plans regarding these tax reforms if they eventually come to power. The leader of one of the opposition parties (Social Democrats) has stated that she intends to roll back these tax cuts. This position induces uncertainty about the future and may have the effect of minimizing the effect of the tax cuts.

Tax is important in determining competitiveness. However certainty about the future is also important. The Danish Social Democrats should therefore take a close look at what their sister party in Britain have done to the business climate by introducing tax rises and set their policies accordingly.