2016.01.28 Does a Rose by Any Other Name Still Smell as Foul?

Do you remember the uproar back in 1999 when NASA crashed a Mars lander because one team used metric measurements and another used inches and pounds?

The problem of not necessarily talking about the same thing when you think you talk about the same thing is very often seen in international communication.

An example is if the pavement is the road or where the pedestrians walk.

Another example is having to rename educational institutions because "High School" means different things to people from different countries. Alumni from "The Business High School" (Handelshøjskolen) or "Denmark's Technical High School" (DTH) may want to change their LinkedIn profiles to Copenhagen Business School/Norwegian School of Economics or Denmark's Technical University - these are all institutions with PhD programs.

But "lost in translation" also happens too often when we think about information from different countries showing up in the news.

The issue came up recently in this Danish article that discussed some of the international (including Danish) myths on how societies work.

The first myth they wanted to debunk was that Danes pay exorbitant income taxes.

Apparently, the average Danish worker has a lower marginal income tax rate than the average American worker: 42.5% vs 43.6%.

The average for all OECD countries is 51.3%.

I will not question the numbers that come out of OECD; the details in the article don't allow for that. But just so we can wrap our heads around this conundrum, let me come with a purely mathematical example:

    In country A, a company expenses 100 money to cover cost of a worker. The worker is taxed 50%, or 50 money, and takes home the other 50.

    In country B, a company expenses 100 money to cover cost of a worker. 20 money goes directly to the government as payroll taxes. Of the 80 money the employee sees, 30 are paid in taxes and 50 are take home pay.

    As is pretty obvious, if the company shells out 100 and the worker takes home 50, the taxes are 50% of the gross expense in both countries. But in country B, the worker pays 30 out of 80 - or only 37.5% - in income tax.

I can't say if this is the recalculation made by the OECD that equalizes the various tax systems, but I do know that many non-Danes - be they American, German, or Dutch - are very surprised when they learn that Danish companies don't have to pay a huge amount of payroll taxes on top the wages (just like unprepared Danish employers can get a unpleasant surprise that the lower wages in other countries not necessarily lead to much lower employee costs.)

I do also know that a 20% payroll tax is not exorbitant as OECD countries go. These taxes typically cover retirement subsidies/social security and, for countries with a single payer public medical system, contributions to this may also be part of the payroll taxes. How exactly the private U.S. medical insurance is included in the OECD numbers, I don't know.

Finally, to be fair to the public perception that Danes pay sky high taxes: The marginal tax rate is not the same as the average tax rate. If you are not an average worker but belong to the Danish 1%, your marginal tax rate will more likely be in the upper 60's percentile. A contributing factor is that investment profits - money made from having money - is much more likely to be taxed on a progressive scale in Denmark than in the U.S.

The article also discussed a myth about the huge social sectors in Scandinavia.

Here OECD's calculations put Denmark on a 10th place and Finland on the 15th place among the 26 OECD countries when it comes to the size of the social sector compared to GDP. Countries like France, Germany, and USA all have bigger social sectors.

The differences come mainly from two sources: The countries differ on whether such expenses are fully, partly, or not at all paid for through the taxes (e.g. medical expenses and preschool) and they differ when it comes to how public subsidies are included in the recipients' taxable income.

If something is not paid for by the government but you can deduct all or part of the expenses on your income statement, can you really claim that nothing is paid by the government? The taxes you save is a government subsidy - even if the word "subsidy" may not be used.

As systems differ across countries, so will the way we interpret numbers related to such systems. We will easily read numbers through a lens that is colored by the system we are most familiar with. Hence easy misunderstandings about the size of payroll taxes, if various types of income will be taxed or not, and a multitude of other issues.

How is this relevant?

Understanding that there are substantial differences in systems is important if one wants to establish a company in or move to a different country. It is also important to realize that people from other countries may interpret what you say based on their very different experiences.

Unfortunately, it probably won't help in the political discussion where nobody listens to the other party or bothers to do fact checks, anyway.

Personally, I wouldn't vote for Bernie Sanders, but I think it is a pity if misperceptions about how the Scandinavian societies really work influences an election where the only two options are discussed as "unbridled Ayn Rand libertarianism" vs "The Hammer and Sickle".

Bernie Sanders has to explain to the Americans what a "Democratic Socialist" is. It cannot be that far from a Social Democrat - and social democracies have been constantly tweaked for 80 years in the countries of some of the most content peoples on the planet, regardless if their governments were Red, Purple, or Blue. (Who is who? Red or Blue, is, by the way, not standardized internationally, neither.)

Whether you agree with the ideology behind a Social Democratic society or not: It has nothing to do with the Soviet Union.

We actually can put a Rover on Mars. Shouldn't we also be able to discuss taxation based on facts, not misunderstandings and fabulations? Or does the subject stink too much?