December 3, 2014

Taxation in the Nordic Model

The Nordic Model has been lauded worldwide as a successful blend of capitalism and welfare.  Your typical progressive will rave how the Nordic countries have free healthcare, free education even in the higher levels, generous unemployment benefits, and high levels of state care for the disadvantaged.  That progressive will say, they do all this while still maintaining economic growth and having the highest living standards on the globe.  However, there are some major faults in the welfare system in the Nordic states, and they must be discussed, amidst the successes of their system.
            Taxation on personal income in the Nordic countries averages around 48 percent.  On top of that level of taxation, most goods in Scandinavia have 25 percent value added taxes, greatly increasing the price of goods and services.  While the welfare safety net is very generous in the Nordic countries, disposable income is surprisingly low for such modern societies.  The only Scandinavian country to fall within the top ten of highest disposable income per citizen is Norway.  Denmark, Sweden, Iceland, and Finland place in the teens and twenties on this ranking.  An Austrian economist would blame the disparity of income on the heavy taxation.  While unemployment rates are surprisingly low in the Nordic countries, so many people have dropped out of the workforce entirely to live off of welfare, that the reason is obvious growth is so stagnant in Scandinavia.
            Maersk, Statoil, Novo Nordisk, Volvo, and many other major companies operate out of the Nordics.  They do so, because something that the Nordic Model does right, is it keeps its hands relatively out of business.  The average business tax rate in the Nordic countries is 22 percent, which is surprisingly lower than the modern average.  This low percentage fosters a business community where hiring more and expanding production is very financially efficient.  Because welfare is based on taxation of personal income, the Nordic nations realized to have a higher aggregate personal income, they need to incentivize employment and growing business.  While many stay out of the workforce because they personally receive so little in return, businesses can hire at higher wages and more working incentives, thereby balancing the system in some regards.

            With average GDP growth of two and a half percent over the course of the last couple decades, there is economic growth in Scandinavia.  There is a welfare net that catches many people, but only at a major expense to those who have employment.  This is causing great slowdown in the growth of the economic engine.  However, the treatment of business in the Nordic Model is surprisingly free and pro-capitalist in comparison to the rest of the modern world.  They do not have a perfect economic engine, in fact, what they currently have is far from it.  Nevertheless, they have made steps in the right direction that other nations would be wise to follow.  It would be wise to adopt a few of the ideas from the Nordic Model, while pushing other, freedom based, ideas from throughout the globe.


Brianne Clark said...

Interesting analysis. I appreciate how you point out that Scandinavia is not in fact as socialist as it is often painted in popular media.

Yes, they do have generous welfare, but there are social incentives not to abuse the system. Given how much smaller the populations are, it's much easier to use social pressure to enforce various norms, like industriousness.

Brianne Clark said...
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