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The Best Tax System on Earth
What America and the world can learn from the Faroe Islands.
It’s the worst turbulence I’ve ever felt. For a moment it feels as though the wings have fallen off the plane. Out the window, I can see the wind tearing shreds of water off the heavy surf. I cinch up my seatbelt and hold onto the seat for dear life. But the rest of the passengers seem unbothered. Across the aisle, even a one-year-old baby is completely serene sitting in its mother’s lap.
My plane is landing at the Vágar airport in the Faroe Islands, and apparently, extreme weather is something even babies get used to here. The lesson is emphasized when I get off the plane—no jet bridge in an airport this small—and almost get bowled over by the wind.
The Faroes, a group of 18 islands in the North Atlantic about halfway between Norway and Iceland, are a peculiar place. They are part of the Kingdom of Denmark, but also semi-independent. All Faroese are Danish citizens and use the Danish kroner as currency, but they have control over most other aspects of domestic and foreign policy. They are not part of the European Union, mostly run their own welfare state, and have negotiated separate fishing and trade treaties with neighboring countries.
But I’m not primarily here to report on the blustery fall squalls, or the staggeringly beautiful scenery, or the abundance of sheep, or the cuisine (the fermented fish is worth trying), or even the local legend about seals that can turn into women—the reason why the tiny village of Mikladalur has a huge bronze statue of a naked woman on its beach. No, I’m here to investigate the tax authority, which is called TAKS.
The Faroes have a tax system that is unique even among its Nordic neighbors, and probably the best in the world. Its operating principles are centralization, efficiency, and simplicity. It’s not the most riveting subject for a travel holiday, I’ll readily admit. But it’s beautiful in its own way—and it makes a major difference in the lives of every Faroese person, from the lowest worker to the owners of the biggest businesses. It’s hard to imagine fully implementing such a system in the United States, but we still might learn from their example.
The Faroes are one of the richest countries in the world by per capita GDP—even slightly richer than Denmark itself. On first sight, this is rather hard to believe. The islands are 180 miles from the Shetland Islands on one side and 400 miles from Iceland on the other, with a population of just 54,000. It rarely gets that cold thanks to the warm Gulf Stream current, but it also doesn’t get that warm even in the brief summer. Thanks to the northerly location, in the winter there are only about five hours of sunlight per day.
The land is impossibly gorgeous, with fjords, brilliant green hills, and spectacular cliffs everywhere you look. One particularly remote promontory was used as a setting for the villain’s lair in the most recent James Bond movie. In celebration, the government set up a gravestone, carved by a local stonemason, at the site where in the film (spoiler alert) Bond supposedly dies.
But it’s a harsh beauty. When I hiked up to visit the grave marker, near the famous Kallur lighthouse, the views left me spellbound, but relentless wind felt like it could easily carry me off one of the hundred-foot cliffs on every side. On another trek out to the Bøsdalafossur waterfall, I later learned that a Chinese woman out hiking with her husband had disappeared on that same trail, almost certainly because she fell into the ocean. After days of searching, authorities gave her up for dead.
So how is this isolated, rugged place so rich? It turns out that the Faroes have turned fish into a cutting-edge economic engine. First, some of the world’s most sophisticated fishing operations make big money catching pelagic fish like mackerel, blue whiting, and herring. A smaller sector catches demersal (that is, bottom-feeding) fish like cod and haddock. “The only thing we export of goods is fish of some form,” Hans Ellefsen, an economist at the University of the Faroe Islands, told me. The total catch is about 30-40,000 tonnes of demersal fish, and 500,000 tonnes of pelagics. Out in the harbor at Tórshavn, the capital, I saw some of these huge fishing vessels, sparkling clean, festooned with electronic equipment—not the grimy trawlers I had been vaguely expecting.
Second, an even more sophisticated aquaculture industry has grown up in the Faroese fjords, largely farming salmon from eggs to fry to fully-grown fish, in a way that avoids disease, parasites, and excessive pollution. That’s created a secondary export industry of subcontractors. “Aquaculture is a quite complicated operation, so we have a lot of companies who produce lighting systems for the fish cages… feed barges, monitoring systems,” Niels Winther, managing director of an employer association called the House of Industry, told me. As a result, salmon alone—which commands a substantial price premium thanks to its color and taste—accounts for 45 percent of Faroese exports. Taken together, fish represent about a fifth of the Faroese economy, and fishing by far its highest-paying jobs.
The fishing business, and the fact that Faroese have been living off the sea for over a thousand years, seems to give locals an unsentimental attitude towards ocean ecosystems. At one point in a bar three drunk, tall young men—like the rest of Western Europe, the average Faroese height seems to be several inches above the American figure—loomed over me and politely but sternly demanded to know whether I ate chicken or beef. When I responded in the affirmative, they argued that this meant Americans should drop their opposition to whaling. I later learned that this was because there is a traditional annual hunt of pilot whales called the grindadráp, towards which American environmentalists have been highly critical. (Alas, my suggestion to trade an end to abusive feedlots and whaling at the same time was not received enthusiastically.)
That said, the Faroese government has implemented both internal quotas and trade agreements to prevent overfishing, thanks in part to a drastic collapse of catches in the mid-1990s that helped trigger an economic crisis, causing the population to shrink by about 10 percent in just a few years. Everyone agrees that must be avoided at any cost. Even the fishing companies agree that the country should not kill the golden herring, though there is a lot of dispute about the shape of marine regulations, both internally and with other countries.
The crisis also partly motivated the establishment of a national bank, the Landsbanki Føroya, which handles the issuance of government debt, monitors financial risks, and maintains a rainy-day investment portfolio equal to 15 percent of GDP. “If there comes a crisis… we have some liquidity to spend and prepare for what to do,” Malan Johansen, the bank’s managing director, told me. Not for the first time, I was struck by the contrast of the Faroes’ cautious economic diligence compared to slapdash American governance—if the U.S. established such an account, it would have about $3.5 trillion in it.
The overall Faroese economy is frankly bursting with prosperity. Unemployment has been below four percent since 2015, below 2 percent since 2019, and currently sits at a mind-boggling 0.5 percent—an all-time record low. Employers are so desperate for workers that immigrant laborers from all over the world are common; I met a friendly Polish bartender named Mateusz who had actually been recruited from Iceland. The Faroes’ income inequality is the lowest in the world; its Gini index, where 0 would be perfect equality and 1 all income going to one person, is 0.21, below even the other Nordics and far, far below the American figure of 0.49.
Underpinning the Faroese economy is an exceptionally sleek and efficient tax system. One way to start to appreciate the magnificence of TAKS is by thinking about how Americans pay taxes. Imagine you run a medium-sized business with a few dozen employees. You’re legally required to send your workers’ payroll and income taxes to the government, so you hire a payroll processor like ADP or Quickbooks to handle that for you (along with employer-sponsored insurance and other benefits). It costs something like $50 per month, per employee, and you have to go through an annoying onboarding process every time you hire someone.
Or imagine you’re one of those employees. At the very least you’ve got to file a bunch of obnoxious paperwork to the IRS every year. If you make much money at all, it’s advisable to keep track along the way of everything that might be eligible for some tax deduction—your mortgage interest, childcare expenses, commuting costs, and so on—and enter it all correctly come tax day. It gets worse if you have a side job. Your two bosses don’t talk to each other, so they don’t withhold the correct amount of tax from your combined income. You’ve got to figure out what you owe and instruct one or the other job to withhold more money, or send quarterly payments to the IRS, or sort it out when you file your tax return—and potentially pay a penalty for underpaying.
This all adds up to an enormous burden on the American people and our economy. Filing taxes takes up an estimated 6.5 billion hours each year—as the right-leaning Tax Foundation points out, the equivalent of 3.1 million people working full-time for the whole year. Assuming average wages for the types of work involved, that adds up to a $313 billion burden on the economy. In terms of actual business, the Bureau of Labor Statistics estimates that there are 83,190 tax preparers, making an average income of $51,080. Payroll processing is also a big business, and a necessary employer expense.
I sat down at the TAKS office with Director Eyðun Mørkøre and its head of communications Diana Gilstón, who explained how Faroese businesses and workers face about as little of this kind of hassle and expense as could be imagined. Here, all ordinary wage and tax transactions are processed through a central government system, and TAKS automatically takes out whatever it estimates you owe before the money is deposited in your bank account, along with any welfare payments—like family or unemployment benefits, pension payments, and so on. (Self-employed people and businesses do have to file tax returns, but this can’t be avoided.)
The Faroes also have an exceptionally clean tax code, with no deductions of any kind for ordinary employment income. A simple tax code, of course, is easier to administer, and Mørkøre does his best to keep it that way. “If the politicians are trying to make some changes … I try to defend my tax system. ‘Don’t do it that way, do it another way,’” he said. The point isn’t to tell the government what kinds of policies it should do, but to urge them to be done in the most efficient manner. He pointed to a commuter benefit run by TAKS that is administered as a direct payment instead of a tax deduction, like it is in Denmark.
This extreme simplicity is unique even among the Nordics. Norway, Finland and Sweden all have deductions—though of course not nearly as many as the U.S., with our rat’s nest of tax loopholes. As of 2022, the Treasury Department counts up 165 tax expenditures—a big reason why the American tax code takes up something like 2,600 pages. The Faroese code could be printed on a fancy restaurant menu.
Remarkably, nobody I spoke with was quite sure about how and why the TAKS system developed. Mørkøre said it was developed in 1984 with help from the Danish government, but wasn’t sure why. Djóni Højgaard, an adviser at the Ministry of Finance, speculated that one possible reason Denmark didn’t adopt it was because at the time it already had a world-class tax system, while the Faroes did not. My sense is that TAKS was only a modest improvement back in the 80s, but with the rise of computer technology and the internet, its clean foundation allowed it to improve greatly.
Other European and Asian countries have tax authorities that calculate your tax liability for you each year, and thus require little more than an annual check-in for normal employees. That’s far better than how the IRS works in the U.S., outsourcing much of the bureaucracy to ordinary citizens. But TAKS is a substantial upgrade even from the world’s most efficient and hassle-free tax systems, which provides several immediate advantages.
First, because it monitors every income stream for each individual, and does it continuously instead of once a year, it can automatically adjust tax withholding on the fly, and almost always hits the correct figure. “When the year is over, almost everybody ends up with ‘oh, it’s correct. I don’t have to pay anymore, and I don’t get any money back,’” said Mørkøre. Continuous collection also eliminates the time risk of the government losing out on tax payments if companies go bankrupt before TAKS could cash their checks.
Second, nearly all government benefit payments are consolidated and partly automated. Instead of welfare agencies having to maintain their own payment systems—like how each American state maintains a separate unemployment bureaucracy, many of which are severely dysfunctional—the government simply tells TAKS who is eligible for what program, and the payments are rolled into the daily distribution.
Third, most of the burden of payroll processing is removed from employers. “Business, they are very happy about this,” Mørkøre told me. “They don’t have to do anything else—they don’t have to transfer some money to the tax authorities or some pensions, or the other funds, nothing. It’s all done at the same time.”
Fourth, TAKS’s requirement that everything happens through their bank-centered system both greatly simplifies their administrative tasks and ensures that virtually every person has a bank account. “It’s impossible to get any money from the government if you don’t have a bank account. Nothing is paid out through a check. It doesn’t exist,” said Mørkøre. Partly because of that requirement, plain vanilla bank accounts take only a few minutes to obtain for any native Faroese, or just a bit longer for any immigrant so long as they have a job.
In America, by contrast, there are an estimated 6 million “unbanked” people who rely on payday lenders or other financial predators for simple access to the payment system, and about 7 percent of adults don’t have internet access, and so couldn’t use any TAKS-style automated customer service tools.
Fifth, Statistics Faroe Islands (the national statistics agency, called Hagstova Føroya in Faroese), has access to data of unparalleled quality and timeliness. “The tax system is a big source for Faroese statistics,” Høgni Vilhelm, an agency statistician, told me. “We collect all taxes and income in microdata,” which they use to publish regular analyses of economic trends.
By way of comparison, U.S. agencies typically rely on surveys for these purposes. The Census Bureau and the Bureau of Labor Statistics, for instance, maintain the Current Population Survey (CPS), which contacts about 60,000 households monthly to interview them about their jobs, income, and other questions. The results are then demographically adjusted such that they represent the whole American population, to create macroeconomic figures. BLS statisticians are as smart as they come, but this process is both cumbersome and potentially wrong. Initial estimates are adjusted after their initial publication, and are frequently found to be inaccurate.
SFI, by contrast, publishes unemployment and income figures that are as close to a literal representation of the Faroese economy as could be imagined—with every single job and what it actually pays down to the krone included. And because the vast majority of the data is collected automatically, this comprehensive data is actually easier to collect than surveys. (At time of writing, the most recent unemployment report found there were exactly 151 full-time unemployed Faroese.)
Other Nordics also use tax administrative data for their national statistics, but they aren’t as timely as the Faroes. The IRS does have administrative data based on tax returns, but very few institutions are allowed access to them, and they are far less accurate thanks to rampant tax avoidance and errors.
On its face, an ultra-efficient tax authority doesn’t seem like an especially Nordic-style project in the usual tradition of strong labor unions, generous welfare states, and so on (though it does have those things as well). It might even be considered somewhat conservative. The right-leaning Tax Foundation, for instance, is constantly complaining about the onerous burden created by America’s ultra-complicated tax code. Before he quit politics, Paul Ryan used to talk about how great it would be to file your taxes on a postcard (though he did nothing of the sort with his signature policy accomplishment, the 2017 tax law).
Republicans, of course, deliberately starved the IRS over the last decade. The agency has a Taxpayer Advocate Service which produces an annual report to Congress on how the agency is functioning, and the 2021 version reads like someone who has been locked in a basement surviving on chicken bones and crusts of bread for 15 years shouting out a window, begging passersby for help.
“There is no way to sugarcoat the year 2021 in tax administration: From the perspective of tens of millions of taxpayers, it was horrendous,” the report admits, cataloguing tens of millions of delays in return and refund processing. This was due in part to a big backlog of unprocessed returns from the previous two years; the worst phone service in IRS history; a glacially slow responses to IRS requests for corrections; and on and on.
Money is the main problem. The “number of individual income tax returns the IRS receives … has increased by 19 percent since [fiscal year] 2010, while its baseline appropriation on an inflation-adjusted basis has decreased by nearly 20 percent.” (This is because Republicans took control of the House in 2010 and refused to fund the IRS so that it would stop auditing rich people and corporations, which did indeed happen.) Because the agency is barely keeping on top of immediate tasks, it has no leftover money to upgrade its increasingly ancient systems. “The two IRS systems containing the official records of individual and business taxpayer accounts are the oldest major technology systems in the federal government,” notes the report, which only leads to more spending over the long term.
Other problems lie outside the agency, however. The IRS still spends billions laboriously processing paper returns by hand and sending out paper checks. But it couldn’t impose an online-only requirement without help from Congress to get universal access to bank accounts and the internet.
The latest reconciliation bill passed by the Democrats had an additional $80 billion for the IRS over the next decade, which is obviously highly welcome. But it will take years for the agency just to dig itself out from its current hole, much less to begin modernizing its procedures—and who knows what Republicans might do the next time they take power.
Faroese conservatism, such that it is, bears absolutely no resemblance to that of U.S. Republicans. But when Mørkøre and Gilstón started talking about the TAKS budget, it sounded a little familiar. “I have a slide here, I love to show it,” Mørkøre said. “This one is how much we cost to finance our work here. In 2012 we cost 72.8 million. This year we cost 70.5 million—less than we did 10 years ago. And the economy has grown a lot since.”
As I listened to Mørkøre, however, it became clear that the implications of his austere budgeting were not remotely what they would be in America—in fact, they were the exact opposite. I realized that the greatest benefit of all of how the Faroes had set up their tax system had to do with the TAKS agency itself.
The need for workers at TAKS has been gradually cut back by careful automation of routine processes, while the remaining staffers have focused even more on auditing rich people and companies. Indeed, that’s one reason for the efficiency upgrades—so it can plow some of the savings into audits. Big companies “are consuming quite a lot of energy in-house. We don’t want to skip that,” said Gilstón. “Eyðun, he really wants to make that more intensive. But that’s why we want IT to be better, he wants to take the resources and put it into the controlling department.”
Instead of the TAKS budget being randomly hacked away by an extremist party with an ideological hatred of taxation, staff had been cut back only when doing so would not reduce the accuracy of tax collection. On the contrary, collections from audits have increased over time. In 2015 it collected about 60 million kroner, while in 2021, “we did correction for 250 million kroner, and that’s mostly businesses,” said Mørkøre proudly.
Meanwhile, the broader economic context changes the implications of streamlining the TAKS system. The rest of the Faroese economy is so red-hot and desperate for workers that cutting back on TAKS staffing and budget materially helps everyone else by freeing up resources and workers. “I have told all the people here that in 10 years we are going to be less than 100, because we have to be more efficient,” Mørkøre said. “And I think it’s the right way to do, because the tax authority, we have to be as efficient as possible, so cheap as possible, so we can have more money or more staff at the hospital taking care of the elderly, things like that.”
Visiting the Faroes, I learned a whole new way that America is a humiliating international laggard. Our tax system is about the worst of all possible worlds—expensive, ultra-complicated, inefficient, slow, inaccurate, and an enormous headache for the citizenry. And there’s another option that reverses virtually all of those factors.
After returning to the states and thinking it over for a time, I’ve concluded that TAKS would not have been built without the broader context of Nordic social democracy. Ideologically, the absence of deductions and butter-smooth tax payment process reflects a profound acceptance of government—especially stiff taxation—that is radically at odds with American ways of thinking. We are addicted to tax deductions, credits, and exemptions because this style of policy allows their recipients to pretend as if they are rugged individualists who don’t depend on government help, and as if taxes are a species of theft. The habit is so deeply ingrained that even when Democrats were passing major climate policy in the Inflation Reduction Act, nearly the entire energy investment program was camouflaged as a tax benefit, in the process adding even more paperwork headaches for the beleaguered IRS.
That is not to say that the Faroes don’t have a conservative side. On the contrary, the conservative coalition won the last election in 2019, and upon taking power scrapped an auction system for fishing permits the prior leftist government had set up. But the contest between right and left takes place between political goalposts that might as well be on a different planet from the U.S.
So it’s probably out of the question to think we could simply copy-paste the TAKS system into America. But we could still learn from their example. We might not be able to scrap every deduction in the tax code, or have every payment routed through a central system. But we could build an opt-in system for anyone who dislikes paperwork. And we could have a cheaper IRS with fewer staff that handled most tax returns automatically, if we cared to follow the Faroese example of careful, long-term investment in computers and automation. I’m sure Director Mørkøre would be happy to explain to any IRS official how he’s done it. Just remember to bring a rain jacket.