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A ‘fat tax’ lesson from Denmark

Speaking White House Friday about extending middle-class tax cuts President Barack Obamsays “I’ve got pen ready sign bill right away.”

Speaking at the White House on Friday about extending the middle-class tax cuts, President Barack Obama says, “I’ve got the pen ready to sign the bill right away.” | Mark Wilson~Getty Images

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Updated: December 14, 2012 6:16AM

‘Something is rotten in the state of Denmark” goes the famous line from Shakespeare’s “Hamlet” that has become shorthand for affairs gone wrong. A rancid odor emanating from Denmark tells us something about taxes and politicians.

You may have read that the little country has repealed its “fat tax” on the likes of butter, oil, sausage, cheese and cream. It was enacted to combat the country’s rising obesity problem but was scrapped after only one year because it was a miserable failure.

Danes switched to cheaper cheeses or traveled to neighboring countries such as Germany to stock up on butter, cheese and other foods containing more than 2.3 percent saturated fat. One German supermarket reported that half the cars in its parking lot last week had Danish license plates, according to the Wall Street Journal.

The tax didn’t do much to stop plump and not-so-plump Danes from chowing down on cheese or sausage. The politicians did manage to enrage Denmark’s citizens by piling an extra tax on something Danes consider to be gifts of nature, namely butter. And the law cut into the bottom line for Danish food producers and supermarkets. So it had to go.

Still, for all its failure, it was a tax, and in its short life it did bring in new money, an estimated $216 million for 2012. And just as Danes like their cheese and sausage, the country’s politicians gobbled up the new revenues and found they couldn’t do without their new diet of extra kroner (no, Copen­hagen didn’t jump off the euro cliff).

Danish lawmakers, who already had given their citizens what the Journal calls one of the world’s highest tax burdens, increased the income tax rate and reduced personal tax deductions to make up for the revenue “lost” from killing the fat tax. The lesson is that the one thing politicians are good at is spending other people’s money (but often they are not wise in how they spend it) and once they get their fingers in your wallet, you have a hard time getting them out.

Keep this in mind over the next weeks and months as the country debates tax and spending policies. The immediate issue of course is the “fiscal cliff” at the end of the year, when the Bush tax cuts expire and spending cuts that nearly everyone on Capitol Hill doesn’t want go into effect.

As part of a deal to not to do a Thelma and Louise off the cliff, taking the country back into recession, President Barack Obama demands that taxes go up on the rich, a position he says was validated by his re-election. Obama campaigned on raising the tax rate for the upper 2 percent of income-tax filers. But among Republicans there’s hope — wishful thinking? — he will agree to eliminate some deductions and credits for top earners to bring in more revenue but not raise rates on job creators.

Obama’s intentions aren’t the only things that aren’t clear. Apparently there is some sentiment for using the lame-duck session of Congress to reach a grand bargain on tax and entitlement reform. That’s a lot to do in a few short weeks. The more likely scenario is a temporary extension of the Bush tax cuts, but not for the wealthy, to give the new Congress time to work out the intricacies of tax and entitlement reform.

If Obama gets higher taxes on top earners in a stop-gap measure, look for him to bank that and up the ante in next year’s negotiations. Tax reform involves closing loopholes in exchange for lower rates. But I wouldn’t be surprised to see that Obama has different ideas about lower rates than Republicans.

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