Highest incomes rarely come from wages or salaries

Low capital gains taxation encourages high-income Finns to make taxation arrangements

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The proportion of yield on capital in the income of the best-earning Finns has grown. The 1,000 Finns with the highest incomes last year got an average EUR 1.8 million in capital gains income last year, up from just slightly over EUR one million two years earlier.
      Capital gains income includes money from dividends, interest, and profits on sale.
     
The proportion of earned income in the income of the rich has declined. The average salary income of those with the highest earnings has actually declined last year to EUR 380,000 from EUR 460,000 a year earlier.
      One reason for the trend involves taxation. The average tax rate of the 1,000 Finns with the highest capital gains income was 29 per cent, while the 1,000 with the highest earned income was 47 per cent.
     Because of the differences in the tax rates, it is a lucrative option for those with higher incomes to get as large a proportion of their incomes as possible from capital income. This encourages arrangements that make it possible for a significant part of income to be classified as capital gains.
     
Taxation experts largely agree that the gap in the taxation of earned income and capital gains income causes problems.
      “The difference in taxation of capital income and earned income is harmfully large, and causes negative side-effects”, says Teemu Lehtinen, managing director of the Finnish Taxpayers’ Association, who says that he would welcome legislation to rectify the disparity.
      Vesa Vihriälä, Undersecretary of State at the Prime Minister’s office says that the problem is widely recognised.
      “The differences have led to taxation planning, in which earned income is turned into capital income through means that appear to be sleight of hand of sorts”, Vihriälä says.
     
At the Ministry of Finance, Undersecretary of State Martti Hetemäki says that the trend is not a problem for state revenue, but that it does contain a thorny fairness issue.
      “It is not a sustainable situation in the long term if earned income can be channelled into capital income”, Hetemäki says.
      He also says that there are plans at the Ministry of Finance to implement actions aimed at alleviating the problem, at least temporarily.
      In September the Ministry of Finance set up a working group headed by Hetemäki, in which the wide gap between capital income and earned income is being examined from a broader perspective.
     The matter is being handled as part of a wider reform of taxation, and Hetemäki does not want to put forward unequivocal solutions at this point.
     Both Lehtinen and Vihriälä are also in Hetemäki’s working group.
     Lehtinen advises caution, because he feels that capital and corporate taxation have worked well in Finland.
     “There has been good tax revenue, and the bottom lines of companies have been put into shape”, Lehtinen says.
     
Minister of Finance Jyrki Katainen (Nat. Coalition Party) took up the problems of taxation last spring, when the practice in which doctors working for private clinics got much of their income in the form of company dividends, raised a number of questions.
     “We need to look at capital taxation and its relationship with the taxation of income. I am not proclaiming that capital taxes should be raised and taxes on earned income should be lowered, but the proportions must be understandable”, Katainen wrote in Helsingin Sanomat in May.
     He also promised to examine the possibilities of plugging gaps which allow work-related income to be turned into capital gains.
     Katainen said in Brussels on Tuesday that there are moral problems if employees operating without risk are able, as entrepreneurs, to avoid work-based income by turning them into capital income.
     However, no concrete solutions have been put forward yet. Katainen says that it is not easy to solve the problem without the emergence of new loopholes.


Previously in HS International Edition:
  Tax statistics show surge in capital gains income last year (4.11.2008)

Helsingin Sanomat