A new tax aimed at Denmark’s richest may fall short because many of the wealthy targets will be able to avoid it by reclassifying their income, according to the state’s fiscal watchdog.
(Bloomberg) — A new tax aimed at Denmark’s richest may fall short because many of the wealthy targets will be able to avoid it by reclassifying their income, according to the state’s fiscal watchdog.
The government’s draft proposal to add an extra 5% tax on annual incomes exceeding 2.5 million kroner ($360,000) can be sidestepped by about a third of those its levied on, the Economic Councils, also dubbed the Wise Men, said in a report on Tuesday. As majority owners in assets they will be able to reclassify income into dividends from wages and thereby escape the tax, the adviser said.
The Nordic nation — which has the European Union’s most conservative public finances — is levying by far the highest taxes on personal income as a share of gross domestic product among the members of the OECD, at 24% in 2021. The government that spans the political spectrum has estimated that its total tax plan, including cuts for lower-income earners, will reduce annual revenue by 1 billion kroner.
“The effect of such tax avoidance is not included in the government’s estimate for proceeds, which is why public finances could be weakened more than the government expects,” the Wise Men said, without providing a forecast on how much the state is set to lose if the richest sidestep the extra tax.
The tax avoidance could be prevented if the government limits reclassification of incomes, but that would lead to “administrative challenges,” the adviser said. Another solution would be to raise taxes on dividends, but that might discourage share investments, it said.
The watchdog also provided new economic forecasts for this year and the next. It now expects the economy to continue an expansion this year, compared with a forecast of recession in its previous report from October, and sees an unchanged pace of growth next year. The Wise Men also lowered their inflation outlook for this year, while raising it clearly for 2024.
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