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Figure 13

Top Tax Rate on Personal Income, Including Sub-National Income Taxes

70%

With Employee Share of Payroll Tax

65%

Personal Income Tax

60%

55%

50%

45%

40%

35%

30%

25%

20%

D enmark

Fi nland

Iceland

N orway

Sweden

U nited States

Source: Organization for Economic Cooperation and Development.

the payroll tax rate is included. Iceland, how-

Many other tax measures also play a role.

ever, has a less punitive system for highly suc-

Payroll taxes reduce incentives to work, and

cessful taxpayers, and Norway actually has a

these levies tend to be more onerous in Nordic

slight advantage over the United States if mea-

nations. Taxes on saving and investment are

suring only the personal income tax.

especially important, with the United States

also having a modest advantage in this area.

Another key difference between America

and the Nordic nations is that top tax rates

America's biggest advantage, though, is the

tax burden on consumption. Value-added

penalize a much larger share of the popula-

taxes (VATs) tend to be less destructive than

tion in Nordic nations. In every Nordic

income taxes, but they still undermine growth

nation, the top tax rate is imposed on tax-

by driving a wedge between earnings and con-

payers with middle-class incomes. Norway is

sumption. Simply stated, people sacrifice

the most lenient of the Nordic nations,

leisure and earn income because of the things

allowing taxpayers to earn the equivalent of

about $75,000 before the top tax rate takes

money can buy. But if taxes reduce the

amount of possible consumption--either

effect. Taxpayers in the United States, by con-

because the money is taxed when earned or

trast, do not get hit with the highest tax rate

spent, then there is less incentive to be pro-

until income climbs to more than $336,000.

ductive. The United States does not have a

On the other hand, every Nordic nation

enjoys a lower corporate tax rate than the

VAT, but all Nordic nations have high-rate

Every Nordic

United States. Corporate income in the

VATs, with Sweden and Denmark imposing

nation enjoys a

the maximum rate of 25 percent.33

United States is taxed at 39.3 percent, while

the tax rate in Nordic nations is no higher

The absence of a VAT does not mean there

lower corporate

than 28 percent.32 As seen in Figure 14,

is no tax burden on consumption in the

tax rate than the

United States. Sales taxes are imposed by 45

Americans firms face a competitive disadvan-

United States.

states, and the federal government imposes

tage in this key measure.

14