Overview of taxation in the Nordics

Tax policy is a core instrument of public policy in the Nordic countries. Whilst popular media often criticise the high taxes in Nordic countries, the public generally recognises that taxes provide necessary support to essential services. They know that to ‘slash’ taxes also means slashing healthcare, education, social security, and numerous other public services. This they have been unwilling to do. However, between 2000 and 2018, total taxes in the Nordic countries declined marginally as a share of GDP.

Feet and legs of people walking, black and white

25 February 2019 by Eric S. Einhorn

In the Nordic region, as elsewhere, tax policies are very complex and constantly changing. This article only provides a brief overview.

High tax

Nordic taxes are high, comprehensive, and relatively simple to administer. The five Nordic tax systems share many similarities, although they are not identical. The table below details how revenue is collected. As a share of the gross domestic product (GDP) tax rates in 2015 ranged from Iceland’s modest 36.7% (roughly the OECD average) to Denmark’s substantial 45.9%, among the highest in the OECD.

Nordic Taxation as Percentage of Gross Domestic Product (2016)
	Denmark	Finland	Iceland*	Norway	Sweden
Income	29.0	15.2	17.2	14.7	15.9
Social security^	0.4	12.8	3.9	10.6	14.6
Property	1.9	1.4	2.0	1.3	1.1
Goods/services	14.8	14.4	11.9	12.1	12.4
Total taxes	45.9	44.0	36.7	38.7	44.0

Notes: *2015 for Iceland; 2016 included special one-year assessments;^includes payroll and social security contributions;

Source: OECD, Revenue Statistics 2018. https://doi.org/10.1787/rev_stats-2018-en

Tax policy

Tax policies are generally notoriously complex and technical. In common with many other European countries, Nordic tax systems have grown more complex over the past century in response to economic changes, administrative capabilities, and fiscal needs. Tax incentives have replaced earlier administrative regulations on economic activities and social policy goals. For example, high automobile taxes in Denmark and Norway replaced rationing and permitting systems during the 1950s. Tax systems have been altered in response to European integration and economic globalisation. Membership in the European Union and the European Economic Area has limited some of the prerogatives of national tax policy. The main impetus for tax reform since around 2000 has been a desire to make national economies more competitive, increase willingness to work and invest, and make tax administration and enforcement more efficient.

What is taxed in the Nordic countries?

Taxes are generally divided into the following:

Income, profits and capital gains.

The tax burden on personal income is high compared with other regions but is notably high in Denmark where it is often the highest in the OECD. Corporate (business) income taxes are below the European Union average in all the Nordic countries except Norway where it is 2.5 times the EU and OECD average (this partly reflects various petroleum taxes).

Social security (paid by employer and employee).

Tax on labour and wages paid through social security payments made by both employees and employers are also high in the Nordic countries, except in Denmark where they are folded into the income tax.

Goods and services (primarily through ‘value added tax’).

Taxes on goods and services provide substantial revenue, primarily through the universal ‘value added tax’ (VAT) but are in line with European rates. In 2018/9, Denmark has a single VAT rate of 25%, while the other Nordic countries have variable levels. Excise taxes on tobacco have long been high across the Nordic countries, but border trading pressures have reduced alcohol taxation in Denmark and are placing pressure on the other Nordic countries’ alcohol taxes as well. Few countries have as prohibitive taxation on private automobiles as Denmark and Norway, which can double the price of a vehicle. Fuel taxes are also high in line with common European policy. Among with long term developments, it can be noted that the long list of excise taxes on ‘luxury’ or ‘sinful’ consumption has been shortened and reduced in large part because of “border trade.” Iceland does not have this problem. Taxes intended to promote environmental goals (packaging, energy, carbon and sulphur emissions, etc.) have been significantly increased.

Property.

Property taxes are mainly on real estate. Despite growing economic inequality, taxes on personal wealth have been cut or abolished in recent years. Estate/inheritance taxes have also been reduced.

Recent tax policy trends

Two tax policy trends are noteworthy:

Lowered marginal income tax rate: Tax reforms over the past two decades have lowered marginal income tax rates considerably while widening the tax base. While ‘tax expenditures’ (reducing taxes on specific income or activities) remain, especially on housing, tax codes have been simplified. While ‘tax avoidance’ (taking advantage of legal tax ‘loopholes’) is still possible, there are fewer opportunities. Typically, social benefits (e.g. pensions) are taxable. Marginal tax rates (income and social security taxes) still approach 60% for affluent earners and are only 15 percentage points lower for average earners.
Increase of taxation on consumer goods: Taxation on consumption has increased while taxes on earnings and capital have been reduced. Especially the ubiquitous and high VAT (supplemented by excises) takes a large bite of out of consumption. It also has the advantage of being ‘geographically neutral,’ that is, imports are taxed the same as domestic goods and service, and taxes on exports are rebated.

Administration of tax

Personal income taxes are levied simultaneously by the national government and the regional and local governments. Local tax rates vary slightly, and municipalities usually have some property taxes. Various transfer and revenue-sharing schemes partially equalize differing local tax bases. Tax enforcement is vigorous. Denmark has been particularly plagued by international tax scandals and domestic administrative malfeasance. Tax evasion has remained a problem. Some is outright criminal activity (narcotic trafficking, smuggling, etc.), while ‘moonlighting’ (working ‘off the books’) and bartering is more widespread. Politicians often advocate tax cuts, but given the fiscal and policy needs of these small open economies, over all rates of taxation have been generally stable.

Collection points of Nordic taxation as percentage of Gross Domestic Product (2015)
	Denmark	Finland	Iceland	Norway	Sweden
Central government	33.4	20.7	27.3	32.4	22.2
Local government	12.3	10.4	9.4	5.9	15.6
Social funds	n/a	12.7	n/a	n/a	5.4