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Contents | Executive summary | How to obtain this publication | Additional information
The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Finland published on 3 June 2008.
Contents
The dual income tax system has been a positive response to globalisation, although it has some drawbacks
Globalisation creates a tension between the need to spend on social safety nets and the need to maintain tax revenue from mobile factors. In response to the increasing mobility of capital, there has been a trend decline in corporate tax rates across the OECD along with a broadening of the tax base. In Finland, the dual income tax (DIT) system has also permitted a much lower tax rate on capital income, while labour income is still taxed more heavily. The DIT system has increased the efficiency of capital investments. Nevertheless, the DIT system creates incentives for individuals to reclassify labour as capital income, and the procedures put in place to limit this have increased the complexity of the tax system, while still permitting some groups of workers to reclassify their income relatively easily. Reclassification incentives could be reduced by lowering the average tax rate on upper income earners. Finland should also monitor the success of the Norwegian shareholder equity system with a view to adopting a similar scheme – if it is judged to be successful – to reduce income-shifting incentives. The 2005 tax reform cut the corporate tax rate slightly to 26%. This brought the Finnish rate below the EU15 average. However, the average statutory tax rate in the new member states was about 19% in 2006 and planned changes will bring it down another percentage point. The latest cut in the corporate rate was not accompanied by any base broadening measures. There is probably still room to broaden the corporate tax base and lower the rate.
Taxes on labour are too high and those on property too low
Although labour remains less mobile than capital, globalisation has facilitated the mobility of jobs and labour. The tax burden on labour is relatively high, particularly for upper-income earners, and there are concerns that by pushing up labour costs, the high tax wedge may be an important factor in production-location and off-shoring decisions. The tax burden on labour should be lowered with priority being given to lowering the top marginal tax rate on labour to keep and attract highly skilled jobs and to reduce incentives for income reclassification. On the other hand, immobile factors such as immovable property are taxed lightly and there is considerable scope for increasing the taxation of property and land. This makes sense not only from a globalisation perspective (given that immovable property is an immobile tax base) but also because property taxes are progressive, and hence may help to substitute for a reduction in labour taxation of the top income earners. Given the importance of cutting labour taxes, the government’s plan to cut the reduced value added tax (VAT) rate on food in 2009 seems a waste of money. To increase efficiency, the VAT base should instead be broadened and the additional revenues used to lower either the VAT rate or labour taxes more generally.
Property taxation: an international perspective
Tax revenues as a per cent of GDP, 20061
1. 2004 for Portugal; 2005 for Australia, Greece, Iceland, Mexico and Poland.
2. Total property taxes; unweighted average.
Source: OECD (2007), Revenue Statistics 1965-2006.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Finland 2008 is available from:
- Subscribers and readers at subscribing institutions can access the online edition via SourceOECD , our online library.
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Non-subscribers can purchase the PDF e-book and/or paper copy via our Online Bookshop
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Government officials with accounts ( subscribe) can go to the "Books" tab on OLIS
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Additional information
For further information please contact the Finland Desk at the OECD Economics Department at eco.survey@oecd.org. The OECD Secretariat's report was prepared by Anne-Marie Brook, Petar Vujanovic, Marketta Henriksson and Marte Sollie under the supervision of Peter Hoeller. Research assistance was provided by Isabelle Duong.
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