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June 25th, 2012

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Tax on employment will be reduced and the top tax bracket will be raised after the government shunned its far-left support partner, Enhedslisten, to forge a cross-aisle tax-reform with the opposition at the last minute.

After the deal with Venstre and Konservative was announced on Friday, the finance minister, Bjarne Corydon (Socialdemokraterne), argued the deal, tailoring the reforrm to benefit those in employment most, would benefit the economy.

“The deal means that it will become more attractive for everyone to work,” Corydon wrote on the finance ministry’s website. “It will mean more growth and a solid foundation underpinning the Danish welfare system.”

Not holding an absolute majority in parliament, the government was forced to compromise in order to pass a tax reform. Typical to Danish politics is the search for broad consensus in order to ensure that policies do not swing dramatically with successive governments.

This presented the government with a conflict, either forge a tax reform with its far-left support party Enhedslisten or with the opposition – the former would produce a reform more in keeping with ‘red’ (left-wing) politics but would be more divisive, while the latter would be more stable though more ‘blue’ (right-wing).

The result is a tax reform that benefits those in work by increasing the earned income credit, while many with middle and upper incomes will benefit from having the top tax bracket increased by 57,900 kroner to 4670,000 kroner by 2022.

The reform will end up costing the government more than it hoped, however, after it allowed the rise in the top tax bracket to also be enjoyed by pensioners, who were initially excluded from the deal.

Further costs were incurred after they also had to give up their attempt to reduce the amount of interest on mortgages that homeowners can deduct from their taxes while also agreeing to freeze property taxes until 2020.

An irate Enhedslisten declared on Friday that it was now "in opposition to the government", but speaking on television this morning, PM Helle Thorning-Schmidt (Socialdemokraterne) argued the government made the right decision in signing a deal with Venstre and Konservative.

“We will better be able to afford welfare than we would have done with Enhedslisten,” Thorning-Schmidt said on Go’ Morgen Danmark. “It’s the deal that is closest to what the government proposed from the start. We will better be able to help the worst off with this deal.”

The tax reform will mean that the government is underfinanced by 300 million kroner, which would be needed to fund the 0.8 percent annual increase to public spending. This fact was admitted by the economy minister, Margrethe Vestager (Radikale), on TV2 News.

“There will be less money for public use because we spent some of the money on tax relief,” Vestager said. “The government wanted to find three billion kroner for welfare. We got 2.7 billion and that is very close to the goal.”

The tax reform received praise from Danish businesses.

“It is incredibly difficult to reduce tax on work,” Karsten Dybvad, managing director of Dansk Industry, a business lobby organisation, told the Ritzau news agency. “A higher earned income credit and a higher limit to paying the top tax bracket will mean that many in work will benefit from working extra.”

Political commentators are warning the tax-reform has further alienated core left-wing supporters of Socialdemokraterne and coalition partner Socialistisk Folkeparti, continuing a trend that has seen voters fleeing both parties in droves, partially in response the perceived lack of commitment to ‘red’ policies.

Socialistisk Folkeparti, the government’s most left-wing party, was particularly disappointed at having to accept a reduction in the rate of increase of social welfare adjustments, a move it has said will increase social inequality.

“When five parties join in a deal, there will be elements that do not chime with the party’s politics and have to be accepted as part of the compromise,” the party announced in a press release after an emergency meeting in Copenhagen this weekend.

Factfile | Tax reform

Key elements

Raised threshold to qualify for top tax bracket by 57,900 kroner, to 467,000 kroner, by 2022.

Earned income credit raised from 5.6 percent to 10.65 percent by 2022 with the maximum annual employment deduction rising from 17,900 kroner to 34,100 kroner by 2022.

Extra earned income credit for single parents, up to an extra 20,000 kroner per year.

The 2009 entrepreneur tax will be rolled back and financed through increased taxation on the finance sector.

Compromises

The proposed decrease in the amount of interest mortgage holders could deduct has been dropped. The parties also agree to keep the property tax and interest deduction at the same level until 2020.

Pensioners get the same adjustment in the threshold before having to pay the top tax bracket as those in employment.

The rate of social welfare spending increases will be adjusted down by 5.1 percent between 2016 and 2023

Financing

The savings will be funded through 2.7 billion cut to defence, a 1 billion kroner rebate on payments to the EU and increased taxation on the finance sector.