The political economy of high income taxation: capital taxation, path dependence, and political institutions in Denmark

Denmark's income tax burden as the percentage of GDP is larger than the total tax burden of the United States, and it has increased further after 1980. How can this be explained, given increasing tax competition and widespread views that strong reliance on regressive taxes was conducive to building and maintaining large tax and welfare states? The article highlights three factors: First, large income taxes are feasible if the capital tax burden is moderated within the income tax. Second, the effective capital income tax burden that had developed up to the early 1980s was extremely low so that subsequent tax reforms could cut marginal tax rates on mobile types of capital income while increasing tax revenue. Third, drastic changes in the legal structure of the income tax and stability in aggregate tax policy outcomes were facilitated by proportional representation and legislative majority rule. Keywords: tax mixes; tax competition; capital taxation; path dependence; proportional representation; veto players