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Why Denmark plans to cut world's highest taxes

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Why tax reform is so hard

Denmark thinks it has found a way to prevent a worker shortage from damaging its economy.

The proposed solution? Tax cuts.

The world's most taxed country said Tuesday that it is planning sweeping cuts to levies on cars and pensions that are designed to encourage people to work more.

"It has to pay off to work," the country's finance ministry said in a statement. "It must be cheaper to be a Dane."

Denmark has the highest tax to GDP ratio of any developed nation, according to the Organisation for Economic Co-operation and Development. The average Danish worker faced a net tax rate of 36% in 2016, far higher than the 25.5% average across the OECD.

With the labor market near full employment, reducing the tax burden is seen as one way to encourage more people to work. That, in turn, could help the country avoid a labor shortage and support an economy that grew by 0.5% in the second quarter.

"It's certainly encouraging that the Danish government is proposing to cut taxes, particularly on employment, since surveys suggest that Danish firms are facing a shortage of labor," said Jessica Hinds, European economist at Capital Economics.

However, Hinds warned that the reforms might produce a relatively small benefit.

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The government wants to give workers with lower incomes a tax break in order to make employment more appealing than unemployment benefits. It is also planning new deductions on pension contributions.

The government has proposed cuts to vehicle registration taxes that will reduce car ownership costs by 15,000 krone ($2,430).

Danes get plenty in return for their tax contributions: the country offers free university education and health care, as well as generous social welfare programs.

The government will need the support of other political parties to pass the reforms.



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