Historically, taxes were introduced to finance wars. They were temporary and were lifted again when the war was over. Later, taxes became permanent and have also been significantly increased to the extent that today it is unthinkable that we would not have to pay taxes. Basically, taxes serve as a source of revenue for expenses in the welfare society, and in addition, taxes are also a great regulatory tool. This is precisely how they are being used during the current crisis, which has led to lower activity in society and where companies, among others, are experiencing a loss in earnings.
During the corona crisis, we saw several examples of the government trying to put more money in the hands of citizens to boost the economy. The payment of holiday pay is one example of this, which is followed by a discussion about whether to change the rules for taxing holiday pay. Similarly, the amount you can earn on holiday home rentals before tax is due has been increased to motivate more people to rent out their homes. This will hopefully lead to more tourists spending money around the country, thereby supporting the economy in hard-hit holiday resorts.
Politicians have also wanted to ease companies' liquidity by allowing them to keep more money to pay their bills during the crisis. This has been done by postponing deadlines for companies to pay taxes and VAT. Taxes and VAT must be paid on all activities, and there are specific deadlines for this. The government can then choose to postpone the payments. Companies have to pay the same amount, but they get a higher cash flow for a period of time. Deferring payments is a relatively cheap tool, as the same amount still has to be paid - just at a later date.
Good adjustment tool
Tax law is particularly good as a regulatory tool because it can be used to influence people's incentives in a certain direction.
One way to help struggling parts of Danish society is to allow tax deductions for special expenses. This is also a way for the state to influence society in a certain direction, because the special tax incentive encourages companies, for example, to invest in precisely the area where they can save money through taxation. If, on the other hand, taxes are levied on something, people refrain from doing those things. Typically, the adjustment is made via the rules for depreciation. Politicians have previously introduced increased depreciation and even the possibility to write off assets that had not yet been acquired.
In previous crises, politicians have also tried to help financially. During the financial crisis, we saw this with aid packages for the banks. What is happening now is that a much larger part of the economy needs help. And this is where tax policy may be better suited. While subsidies and bailouts are best when you can identify specific groups that have a problem, tax policy is a better tool in a situation where more people need help and where ‘more people’ is a more indefinable group. Therefore, tax policy is a powerful regulatory tool when large parts of the business community need to be helped financially or incentivised to invest.
Deduction or subsidy?
When providing financial assistance, it is often a political choice between offering grants or access to deductions.
There are both advantages and disadvantages associated with this. Often, providing grants will result in greater administrative burdens compared to offering access to deductions. The recipient will need to prepare an application with the necessary documentation. The public sector must establish a system to process the applications and ensure the funds go to the right place. However, grants are typically preferred by recipients, as a deduction only has value if there is income to offset it against, and in an economic crisis, businesses often do not have sufficient income to utilise the deduction option. It is often more predictable for the public sector to know the cost of financial assistance if grants are provided rather than access to deductions.
The limitations of tax law
A large part of the Danish economy is linked to exports to other countries, and Denmark can only regulate its own tax policy. A limitation of tax law is therefore that it primarily allows you to solve domestic problems.
The challenge of using tax law as a tool in times of crisis, for example, is that tax laws have become extensive and confusing when it comes to taking care of all kinds of concerns. But this is the price you have to pay if you want to use tax law to promote purposes other than simply collecting money. You cannot demand that tax law should solve many of society's problems on the one hand, and demand that tax law should be simple.
