Social partners support proposed tax cuts

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In December 2002, two governmental working groups issued their reports on the reform of the Finnish taxation system, which is under pressure because taxes are high by international standards. They recommended that taxation should be cut in order to increase employment. Both employers and trade unions share this view.

In December 2002, the long-running debate on Finnish taxation levels - which are widely considered to be high by international standards, and a competitive disadvantage for the country (FI0209105N) - continued. Two working groups set up to consider future government taxation policy (FI0201142N) issued their reports, to which the social partners responded

Employers' views on current situation

There is a general reform of taxation going on in many European countries. According to the Confederation of Finnish Industry and Employers (Teollisuuden ja Työnantajain Keskusliitto, TT), 12 Organisation for Economic Cooperation and Development (OECD) countries have already cut their corporation taxes, while marginal income tax rates are being lowered in many countries. For example, TT mentions that income tax in Germany will be reduced over the coming years, with the highest marginal rate being cut to 42% by 2005. In the Netherlands, the highest marginal rate will decrease from 60% to 52%, and in Belgium to 50%. These reforms have been justified on the grounds that tax cuts promote the favourable development of employment and maintain economic growth. Furthermore, state tax revenues have increased in many of the countries concerned, despite the tax cuts. TT states that Finland, together with Denmark, remains among the EU countries with the highest marginal income tax rates, at 58%-60%.

According to TT, Finland's overall gross tax rate is still too high, standing at about 45% in 2002. In the employers' organisation's view, the country's stiff income taxes and their steep progression hinder economic growth and employment. TT also believes that corporate taxation is at the 'pain threshold'. TT urges the next government - a general election is due in spring 2003 - to cut taxes significantly at all income levels and to safeguard the competitiveness of Finnish corporation and dividend taxes. TT believes that the current high taxation is weakening the profitability of work for all. As a result, expertise could drain out of Finland and move abroad. In the view of TT, the upper income tax limit should be cut to 50% by 2007.

TT states that limited companies are paying record high taxes in relation to Finnish Gross National Product (GNP), though it is estimated that tax revenues will have continued to fall in 2002. In 2000, taxation on corporate income in Finland amounted to almost 6% of GNP, or EUR 7 billion, up from 5% in 1999. For 2002, revenue from corporate taxation is estimated to be about EUR 5 billion. According to TT, many OECD countries are decreasing their corporation taxes, while Finland has decided to keep the corporation tax rate at 29%. In 1995, the basic corporation tax rate was more than 10% below the OECD average. Now, the difference has shrunk to about 2%. In order to restore the competitiveness of Finnish corporation tax, the rate should be decreased to 25%, states TT.

TT is also concerned about the high taxation of income from shares. It states that saving via the equity market is taxed in Finland at the fourth highest rate in the EU, about half as much again as the EU average. Although profits from shares are taxed only once in Finland, capital gains tax and wealth tax increases the overall taxation on such savings. In many other EU countries, capital gains and wealth are not taxed after two years' ownership.

Working group suggests tax cuts

The working groups examining a reform of taxation issued their conclusions in December 2002, recommending that taxes should be cut. The first working group, appointed by the Economic Council (a consultative body chaired by the Prime Minister) stresses the importance of responding to international tax competition and decreasing taxes in order to speed up economic growth and employment. TT sees these recommendations as being along the right lines. It believes that, in Finland, tax revenues are best safeguarded by reducing income and corporate taxes. However, TT considers it essential that taxes should be cut by even more than the working group suggests, at all income levels including the higher ones, so that Finland can respond to international competition for skilled labour. TT emphasises the necessity of easing taxation in order to promote growth and employment. The working group, however, suggests that taxation on dividends, energy, real estate, inheritance and gifts should be increased, on grounds of income redistribution. TT sees such increases as problematic and difficult to justify. The employers' organisation is also against the proposal of the other working group, appointed by the Ministry of Finance, to move towards double taxation of share dividends.

The Employers’ Confederation of Service Industries (Palvelutyönantajat, PT) is in favour of cutting all taxes more radically, especially in labour-intensive sectors.

SAK supports tax policy which boosts employment

According to the Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK), the report of the Economic Council working group, supports many of the unions' tax goals. In SAK’s view, the focus of taxation should be shifted away from the work and towards capital income, for the sake of both employment and fairness. SAK also supports the working group's view that tax cuts should be directed towards those on low incomes. However, it criticises suggestions in the report of the Ministry of Finance working group that corporation and capital gains tax should be cut and wealth tax completely abolished.

The Confederation of Unions for Academic Professionals (Akateemisten Toimihenkilöiden Keskusjärjestö, AKAVA) sees the proposed tax cuts as justified and focuses particularly on lowering the rate of tax progression for its members.

Commentary

The two working groups have evaluated Finnish taxation and come to the conclusion that it should be reduced for the sake of employment. This view is supported by both the employers and the trade unions. Since the recession of the early 1990s, unemployment has remained high and proved difficult to decrease. Now, tax cuts are regarded as the solution. It is believed that a reduction of taxes on low incomes especially would promote employment. However, at the same time, many low-wage segments of the public sector would suffer from the resulting declining tax revenues. The discussion on taxes is a rather technical one, but there is a clear belief that unemployment would ease if taxes were cut. Anyhow, it is also clear that taxes will be reduced in Finland in the name of international tax competition. However, any kind of mass emigration of companies or workers due to tax considerations is hardly to be envisaged, because the decisions of economic actors are also affected by many other factors. (Juha Hietanen, Ministry of Labour)