What if the price for universal health care, tuition-free higher education, and elderly care was called “social benefit payments” instead of “taxes”, would there still be such strong opposition to it? If you simply compare the costs with the benefits, are they worth paying for? The following is a comparison of two hypothetical families in the United States and Denmark. I’ve used common sense and simple arithmetic with easily verifiable costs in order to demonstrate how a country with such high taxes can also have such a high quality of life. I’ve tried to be as accurate as possible. In some situations, I’ve had to use an estimate or an ‘average cost’ and I’ve included a list of resources below where you can see how I reached the numbers.
The Nielsens and the Smiths.
The families both consist of two married adults with similar jobs and two children aged 1 and 14. The Smith family lives in the United States. The Nielsen family lives in Denmark. All values are expressed in USD and are converted from DKK with the average exchange rate of 6.6708, sometimes rounded to 6.7 for simplicity.
The Smith family’s gross income is 75,000 a year. Using the standard deduction of 24,400, their taxable income is 50,600 which puts them in the 12% bracket for federal taxes and they pay 6,072. US states have varying tax rates, I use 4% for this example which costs the Smiths an additional 2,024. I assume 0% municipal tax. For their two children, they receive a 2,800 tax credit. Their tax payments total 8,096 or 16%. I add the tax credit back in and the Smiths’ net income after taxes is 69,704.
The Nielsen family lives in Denmark and they earn the same gross income as the Smiths. They pay a labor market contribution tax that is a flat 8% of their gross salary which comes to 6,000. After this tax is deducted, the first 13,851 they earn is excluded from income tax calculations so income tax is calculated from 55,149. This puts the Nielsens in the bottom national tax bracket of 12.16% so they pay 6,706 to the national government. Using an average tax bracket of 23% for municipal tax (assuming no interest, commuter or union deductions), the Nielsens pay another 12,684. The Nielsens can choose not to pay the church tax so their total tax liability is 25,390 for a total percentage of 46%. No one in Denmark pays more than 52% of their income, including the very rich. For their two children, they receive a deposit back into their bank account quarterly for a total of 4,435 annually (think of it as a child tax credit, but the amount varies according to the age of the child, more for young children). I add the child benefit back and the Nielsens’ net income is 54,045. At first glance, it looks like those high taxes are outrageous. The Nielsens are taking home 15,659 less than the Smiths at this point, but I must calculate tax benefits to make a fair comparison.
Health and Dental Care
The Nielsens’ health care is a benefit paid by the national health care system. Dental care for their children, up to age 18, is also included. The Smiths do not receive national health care so I’ve got to subtract their annual premiums for a family of four (7,200) and hope that they don’t need any actual services this year which would require them to use up their deductible. The Smiths’ kids don’t get free dental care either so they’ll have to pay for three regular visits and braces this year for a total of 5,800. The Smiths are down to 56,704 for the year assuming no visits to the doctor or any other health-related services. The Nielsens net income is still 54,045 so the Smiths are still earning more at this point, but the difference is only 2,659 after only factoring minimal health and dental costs.
The Nielsens don’t have to save money for their kids’ higher education because all institutions have free tuition in Denmark. Their children will actually be paid a grant by the government called SU for a total of 11,232 per year for up to 6 years while they study if they are not living at home. In order to make this comparison fair, the Smiths would have to pay into a 529 plan in order to make sure their kids have the same opportunity to receive higher education debt-free. It gets more challenging to calculate at this point, but a general rule is that the Smiths would need to put in 2,000 per year per child into the plan to achieve only half the cost of American university education, hoping that the other half can be covered by financial aid and loans. I’ll be generous and calculate what’s required for the Smiths to cover 75% of the total cost of the education and assume their kids get scholarships for the other 25%. This year, the Smiths must put 6,000 into the 529 plan. It’s a pre-tax contribution so their tax burden is reduced by 960 so I’ll add that back into their income and the total comes to 51,664. I haven’t added the SU income that the Nielsens’ children receive so their income remains the same at 54,045. The difference between their incomes is now 2,381 and has shifted in favor of the Danes.
At this point, I might have you convinced that even though Denmark has much higher taxes, citizens receive a greater benefit in return. If you’re still in doubt, though, read on.
It is expensive in any country. Both the Smiths and the Nielsens can choose to send their child to a daycare center or to private home care. Using an average cost for a child in a daycare center in the US, the Smith family pays 10,400 annually for full-time care. There is a child care tax deduction, which requires filling out Form 2441 of the IRS tax return. I took a look at a filled 2441 with similar financial information for the sake of this comparison and the result was 2 dollars. That’s not a typo. A deduction only changes the taxable income by 2 dollars. It costs more in time to fill out the form than the deduction is worth. So for the sake of this comparison, I’m ignoring the deduction. It doesn’t impact the financials in a significant way for a family at this income level and, if you remember from earlier, we also ignored deductions that the Nielsens could have taken to reduce their tax burden. The result for the Smiths is a reduction in income to 41,264. In Denmark, the cost of child care is shared by the government. Citizens pay a portion based on their income level. The Nielsens earn too much for a reduction in their portion so their cost for full-time child care for their one-year-old is 4,572 per year. This brings the Nielsens income to 49,473 for a difference of 8,209 compared to the Smiths.
We all know, though, that shit happens. What if a member of the family needs to have a minor surgery? The average cost for a medical stay in the US is 15,734. Thankfully, the Smiths have health insurance so they only have to pay an additional 12,000 to meet their deductible for the year and the insurance company will cover that extra 3,734. Even if something happens to someone else in the family this year, the out of pocket maximum will protect them from paying any more than that…this year. The Smiths’ income has been reduced to 29,264. I’m also assuming that the Smiths can even afford to pay for the medical bills without incurring debt which would cost them even more in the long run. The Nielsens have national health care and pay a small amount, roughly 50, for reasonably priced prescriptions relating to the surgery. Their income is reduced slightly to 49,423, a difference of 20,209 in favor of the people living in one of the happiest countries in the world.
Looking at it another way… if I add only the extra expenses the Smiths paid for health insurance premiums and dental care (13,000) to what they had already paid in taxes (8,096), the new percentage of benefit payments is 41.7%. Compare that figure to the Nielsens 46% in social benefit payments. I’m adding the term social here when referring to the Nielsens’ benefit payments because they affect society as a whole rather than their family alone. If I continue to add the benefit payments for higher education that the Smiths paid out, then their percentage becomes 51.7% while the Nielsens’ social benefit payments remain the same at 46%. Adding in child care costs results in 72.2% of benefit payments for the Smiths and 46% of social benefit payments for the Nielsens. Adding in an emergency surgery results in 96% benefit payments for the Smiths and 46% social benefit payments for the Nielsens. Now, re-read this paragraph and mentally substitute the term taxes instead of benefit payments. Let that sink in.
Every worker in Denmark is entitled to 5 working weeks, or 25 days, of vacation by law and sick time is paid by the employer or the municipality. The Nielsens have 12.5% of their income withheld each month, but it is then paid back to them from the government when they take their holiday time off. There are certain circumstances where workers may request their unused holiday time as payment. In the United States, there is no legal requirement for paid sick or holiday leave. 85% of private industry employees in the US earn ten paid leave days after one year of employment. The Smiths’ income comes from a company with mid-range benefits and they receive 10 days of paid leave a year, but sick time is deducted from this total paid leave. I’ll assume for this comparison that the two families both used 10 days of sick time. (It’s not a crazy assumption, it’s what happened in my family for years). This means that for the Smiths, there was no paid leave leftover for vacation. In order to make the comparison fair, I have to give the Smiths five weeks of vacation time as well, but subtract the income they would have earned during the 5 weeks that the Nielsens are on vacation. The Nielsens income remained the same at 49,423 but the Smiths earned 8,203 less. Their total income is reduced to 21,061, a difference between the families of 28,362. Or, if we calculate the lost income in terms of benefit payments, the Smiths paid 112% in benefit payments to receive the same benefits as the Nielsens, who paid 66% less.
Maternity / Paternity Leave
In our example, the families already have two children so they didn’t use maternity or paternity leave in 2019. If they had, the mother in the Nielsen family would be eligible for 4 weeks of late pregnancy and 14 weeks of maternity leave for herself alone. The father receives his own 2 weeks of paternity leave and the remaining 32 weeks that add up to a total of 52 weeks can be shared between the parents in whatever way they choose. The mother in our example earns enough to qualify for the maximum maternity benefit of 650 per week for a total annual salary of 33,800 during the year she has a baby. The income for the parents in the US if they take 52 weeks of parental leave? Zero. Two children? 67,600 more for the Danish family. All for the low, low price of 46% in social benefit payments.
Home care, for example, doesn’t really fit into a mathematical comparison about an average family with children. But what if these families had a parent that required significant care due to an illness or disability? This care is covered by the national health care system in Denmark. A small army of health care staff, employed by the municipalities, are tasked with seeing to the daily needs of these citizens. Services include daily help getting out of bed, personal hygiene care, help to get dressed, help with meal preparation and/or eating. Help with other tasks such as laundry, shopping, and cleaning. In the United States, these services might become the responsibility of the Smiths or they may incur a significant cost for private care. For the Nielsens? 46% in social benefit payments.
There are so many additional services that I haven’t covered here. Pension, housing benefits, disability / elderly aids and equipment, and education funding to reduce the cost of private schools just to name a few.
I’ve tried to focus on the financial impact because this post is primarily about what is calculable, but you should also take a moment to consider the quality of life difference between the two families as well. How much stress is the American family under? The Nielsens don’t factor in the cost of an ambulance when deciding if they should call one in an emergency. The Nielsens don’t fear financial ruin due to an unfortunate accident or a chronic illness. They have 5 weeks of vacation time to look forward to every year without fear of losing their jobs and have the knowledge that each of their friends, family members, neighbors, and fellow citizens have that time off to enjoy as well. The Smiths have been forced to take a vacation for the purposes of the calculations, but in reality, the Smiths wouldn’t take a vacation if it put their jobs at risk. Some Americans haven’t had a vacation in over ten years. The hypothetical Smiths have been able to put away savings each year for their children’s education, but in reality, most American families cannot afford to. The Nielsens children have the same opportunity to higher education, regardless of income level or family history. The Smiths may have to take on extra costs or care for an elderly family member, but the Nielsens are content in the knowledge their loved ones will be taken care of. The Nielsens don’t worry about who will take care of them in old age or how they’ll afford it.
What’s the catch? I haven’t found one yet. The cost of living in Denmark is higher than in the United States, but wages for entry-level jobs are higher too. An entry-level worker at a restaurant earns 14 / hour after taxes while their American counterpart earns less than half of that before taxes. A 25% VAT (value-added tax) on all goods and services increases the cost of consumer products and services. A steep tax on the registration for vehicles (amount dependent on fuel efficiency and other factors) encourages cycling in major cities, but that doesn’t stop people from buying Audi, Mercedes, and Tesla vehicles. It’s not a shocking sight to see a Porsche or Ferrari in Copenhagen. Ultimately, though, what people spend their money on is a personal choice and open to a wider range of calculable options. This is possible because even though the taxes are high (or low if you think in terms of social benefit payments), Denmark is a capitalist country with some very, very rich people. More importantly, though, there are fewer people in poverty in Denmark than in the United States. Denmark also maintains a balanced budget. Which society would you want to live in?
Kairoscene: Apples to Æbler: the math (table).
Average Currency Exchange Rate
US Taxes: Federal Income Tax Brackets
US Taxes: State Income Tax Rates
US Taxes: Standard Deduction
US Taxes: Child Tax Credit
US Taxes: Child Care Credit
US Taxes: IRS Form 2441
Working and Living in Denmark
Child Benefit Credit in Denmark
Health Care Costs in US
Dental Costs in US
Sickness Leave in Denmark
Paid Leave in Denmark
Paid Leave in Denmark from 2020
Paid Leave in the United States
Cost of Higher Education in Denmark
Cost of Higher Education in US
Child Care Costs in the US
Child Care in Denmark
Child Care Costs in Denmark
Maternity and Paternity Benefit in Denmark
Home and Elderly Care in Denmark