The Fiscal Trilemma in a Danish Perspective

Abstract

This article argues that the “fiscal trilemma”—the tension between sufficient revenue and long-run fiscal sustainability on one side; medium- to long-run growth opportunities on the other; and progressivity and avoidance of inequality on the third side—is very much present in Denmark. We provide an overview of main features of the Danish tax system; the state of fiscal balances in the short and longer run; growth and productivity developments; and the extent of inequality in the Danish society. Thereafter, we go into details with reforms and changes in the tax system over the last twenty-five years and diagnose main problem areas. We argue that the tax reform carried in Parliament on September 13, 2012, does not pass a “trilemma test”; that is, it is in conflict with at least one of the three key considerations. Finally, we put forth reform elements that should improve the system.