The taxes on capital gains are very high in Denmark. The highest real effective tax rates correspond to a tax of about 85 percent, and are thus higher than tax rates on earned income, even though taxes on capital have greater negative socio-economic effects. Capital gains are also taxed highly in comparison to other countries.
The tax on capital returns distorts total savings, and the very unequal tax rates on different types of returns distort the composition of these savings. In addition, funding for small, new, and high-risk businesses is heavily taxed.
Economic theory suggests that capital gains should not be taxed at all. Capital taxes are even unsuitable for redistribution policies. In all circumstances, capital should be taxed at a lower rate than earned income. A first step in a reform of capital taxes might be to decrease all taxes on free savings to a flat tax no higher than 25 percent, when the tax on interest deductions falls to this level in 2020. Another possibility is to lower all rates for all forms of capital income to the same level as that of pension fund returns, 15.4 percent.
The introduction of a flat tax on returns on capital can even be done revenue-neutrally.
It is important that the tax reforms announced for the autumn not only encompass taxes on earned income, but also taxes on capital gains.
