Globalization May Keep U.S. Tax Rates Low

In Denmark, high taxes lead the best and the brightest to leave.

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Interesting story in the International Herald Tribune about a growing consensus in Denmark that income taxes are too high and hurting the country's ability to keep workers in the country. This, I think, is another example of how global economic competition and greater worker mobility will have a tendency to push tax rates down. There is actually a movement in the European Union to harmonize tax rates to minimize the sort of wage arbitrage this story talks about:

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent . . . Denmark is the home of "flexicurity," the catchy name given to a system that pays ample unemployment and welfare benefits but, unusually in Europe, imposes almost no restrictions on hiring and firing by employers. . . . The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark's growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor. . . . The movement toward lower taxes passed Denmark by, even as it took root in much of Europe . . . . Small East European countries, notably Estonia and Slovakia, started the trend by imposing low, flax taxes on income and corporate profits about five years ago. Those moves helped prod Austria, and eventually, Germany, to slash high marginal rates as well.

By the way, if the Bush tax cuts are left to expire in 2010, if Charlie Rangel eventually gets his surtax on the rich passed, and if we lift the income tax on Social Security as Barack Obama wants to do, our top marginal income tax rate will be like Denmark's—if not higher. Remember, economic growth is all about how many people are working and how productive they are.