"I know that some people in the US associate the Nordic model with some sort of socialism. Therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy ... The Nordic model is an expanded welfare state which provides a high level of security for its citizens, but it is also a successful market economy with much freedom to pursue your dreams and live your life as you wish,”Or as Paul Krugman wrote last week in his New York Times column in a discussion of the standards of living in northern European countries: "[T]hey aren’t `socialist,' if that means government control of the means of production. They are, however, quite strongly social-democratic."
Increasingly ambitious welfare state arrangements and full employment after World War II also provided exceptionally high economic security, generous provision of public-sector services, and a relatively even distribution of income. It therefore seems natural that, especially during the early postwar decades, Sweden was generally regarded as having been able to combine economic equality, generous welfare state benefits, and full employment with high economic efficiency and rather fast productivity growth. But slower economic growth from about 1970, a collapse of full employment in the early 1990s, a recent widening of income differentials, and retreats of various welfare-state benefits have made the picture of the "Swedish model" less idyllic.Lindbeck describes a number of problems that arose, including "disincentive effects, problems of moral hazard and cheating with taxes and benefits, deficiencies in competition in markets for products and services, as well as inflexible relative wages .... [and] the ever higher ambitions of politicians to expand various government programs, and the gradually rising ambitions of union officials to compress the distribution of wages as well as to expand the powers of unions."
"The Nordic countries themselves recognized the economic harm of high tax rates in terms of creating and retaining businesses and motivating work effort, which is why their marginal tax rates on personal and corporate income have fallen 20 or 30 points, or more, from their peaks in the 1970s and 1980s. ...
Regardless of whether they are rich, poor, or in between, Nordic households are required to pay an additional VAT of 24 or 25 percent on their purchases, on top of all the other taxes that they pay. By comparison, sales taxes vary by U.S. State, but none is that high, and the national average rate is about 6 percent.
Even without the VAT, the high Nordic rates apply to everyone, not just the rich. The OECD prepares a measure of progressivity that is the share of nationwide household taxes paid by the top 10 percent of citizens (ranked by their income), expressed as a ratio of the share of national aggregate income. The ratio would be 1 if the household taxes were a fixed proportion of income. A regressive (progressive) tax would have a ratio less (greater) than 1, respectively. ... Four of the Nordic countries have essentially proportional household taxes. The average progressivity of all five countries is 1.01, which is 0.34 less progressive than in the U.S."
The contrast is even more striking when considering the so-called “participation tax rate,” which is the effective average tax rate on labor force participation when accounting for the distortions due to income taxes, payroll taxes, consumption taxes, and means-tested transfers. This tax rate is around 80 percent in the Scandinavian countries, implying that an average worker entering employment will be able to increase consumption by only 20 percent of earned income due to the combined effect of higher taxes and lower transfers. By contrast, the average worker in the United States gets to keep 63 percent of earnings when accounting for the full effect of the tax and welfare system.
Even though these programs are typically universal (and therefore available to both working and nonworking families), they effectively subsidize labor supply by lowering the prices of goods that are complementary to working. That is, working families have greater need for support in taking care of their young children or elderly parents. ... [H]igher public support for preschool, child care, and elder care is positively associated with the rate of employment. Moreover, the Scandinavian countries are strong outliers as they spend more on such participation subsidies (about 6 percent of aggregate labor income) than any other country. ... Broadly speaking, countries tend to be divided into those with relatively small tax-transfer distortions and at the same time small subsidies to child care and elderly care (such as the United States and countries of southern Europe) and those with a lot of both (like the countries of Scandinavia).
"The same OECD study estimates that, while many American students pay tuition, Americans are somewhat more likely to attain tertiary education on average. In comparison with the tertiary schooling returns in the Nordic countries, American college graduates get their tuition back with interest, and also a lot more. To put it another way, the rates of return to a college education in Nordic countries are low, and propensities to invest are not high, despite the fact that such an investment requires no tuition payments out of pocket."