Taxes
13. Oct 2023
Lower tax level
Public tax revenues in 2022 amounted to just over DKK 10.2 billion, a year-on-year increase of DKK 621 million (6.5%).
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Lowest tax level since 2016
The tax level is the total amount of taxes and duties collected expressed as a percentage of GDP. The tax level rose significantly in 2020 when the Covid-19 pandemic hit, reaching 43.8% of GDP. It since fell in 2021 and 2022 and has now come down to 40.6%. The reason is that GDP has grown faster than tax revenues.
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Compulsory actual social contributions grow in prominence
Compulsory actual social contributions include payments from employers and employees for e.g. unemployment insurance, the labour market supplemental pension fund and national health insurance. These contributions now make up a larger portion of total tax revenues than in previous years. In 2006, compulsory actual social contributions accounted for about 8% of public sector tax revenues. In 2022, this figure had nearly reached 13%. Contributions to the labour market supplemental pension fund have seen a particularly high relative increase since 2015.
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Taxes on goods and services
Taxes on goods and services have ranged between 29% and 31% of total tax revenues in the past decade. Prior to the 2008 financial crisis, these taxes ranged between 33% and 35%. VAT accounted for a full 76% of all taxes on goods and services in 2022. VAT revenues increased by 5% year-on-year in 2022.
The biggest fluctuations occurred in excise on registration of vehicles. Revenues from this excise have traditionally been vulnerable to economic trends. During the downturn in 2020, the number of registered vehicles (excluding mopeds) dropped by 6%. This figure increased slightly in 2021 only to fall almost 20% in 2022. This decline in new vehicle registrations is reflected in revenues from excise on registration of vehicles. The increasing number of electric vehicles being registered is also having its effect on revenues as these are not subject to excise taxes. Revenues from excise on registration of vehicles dropped by 37% from 2021 to 2022.
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Faroese tax level in a Nordic context
The Faroese tax level is at a similar level to that of the mainland Nordic countries, while it is slightly higher than that of the western Nordic countries. The tax level changes from one year to the next, but the tax level in the Faroes, Norway and Finland has historically been at similar levels, while Denmark has had a slightly higher tax level.
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Modified tax level lower than standard tax level
There are several ways to measure the tax level, as shown in the graph below. The modified tax level shows the portion of the gross national disposable income used to fund government spending on public administration and services. Government spending in this case does not include monetary transfers and subsidies to citizens and businesses, respectively, because the tax receipts used for transfers are an expression of government redistribution of income rather than spending. The modified tax level was 32.5% in 2022.
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Different tax level measurements
Since different countries use different methods of measuring the tax level, international comparisons of the tax level should be made with caution.
Total tax level
The most common method of calculating tax level for international comparisons is the tax-to-GDP ratio, which compares total taxes and duties with the GDP at market prices:
Tax level = tax percentage of GDP
Adjusted tax level
Gross domestic product (GDP) is the total value of all finished goods and services produced in a country. GDP does not show the scale of income across society. The gross national income indicates the total income of people and businesses resident in the economy. Gross national income thus includes investment income and compensation of employees from abroad and subtracts investment income and compensation of employees resident in the rest of the world. Adding current transfers from abroad (e.g. the block grant from Denmark) and subtracting current transfers to the rest of the world renders gross national disposable income at market price.
By comparing total taxes and duties to the gross national disposable income, we see how large a share of the gross national disposable income is paid in taxes and duties to the general government sector. This is called adjusted tax level and is calculated thus:
Adjusted tax level = Tax percentage of the gross national disposable income
Modified tax level
A portion of the total taxes received by government is returned to the residents of the economy as current transfers to households and subsidies to businesses. The general government disposable income indicates the portion of government consumption and government savings that is funded by the taxpayers. Thus, the modified tax level shows how big a portion of the gross national disposable income is available to the general government sector for funding administration and services. Modified tax level is calculated thus:
Modified tax level = general government disposable income expressed as a percentage of gross national disposable income
Factor tax level
Taxes on products and production constitute a share of both total taxes and GDP at market prices. If an increased portion of taxes and duties collected stems from taxes on income, while a smaller portion stems from taxes on products and production, the tax level increases, though total taxes may be unchanged. This effect is neutralised when measuring taxes against gross domestic product at factor cost.
The factor tax level thus expresses the ratio of total taxes to GDP at factor prices instead of market prices:
Factor tax level = tax percentage of gross domestic product at factor prices
Changes to the tax measure from 2008 to 2021
In the latest compilation of the government financial statistics, the property registration tax has been classified as tax revenue. Previously the property registration tax was classified as ‘Other current transfers from domestic sectors’ and was not a subset of total taxes.