Income disparities growing faster in Finland than in any other OECD country
Favourable tax breaks on capital income seen as primary explanatory variable
According to a recent survey conducted by the Organisation for Economic Co-operation and Development (OECD), the gap between rich and poor has widened more in Finland than in any other wealthy industrialized country over the past decade. The survey indicates that he income disparities grew in Finland particularly fast in the period from 1995 to 2005.
The only other country with almost the same pace was Canada.
Statistics over the past two decades show that the growth in income disparities was highest in New Zealand, with Finland coming in second. However, New Zealand’s income gap widened only in the period from 1985 to 1995, while the past decade no longer saw any significant growth in the country’s Gini-coefficient figures, the standard unit of measurement in this context.
In spite of the rapid growth rate, Finland is still a country with low inequality of incomes, clearly below the average. Among 30 OECD countries Finland is seventh, while Denmark and Sweden are in a class of their own with the lowest income disparity of all.
Finland has rapidly moved from a traditional Nordic country with equal income, progeressive taxation, and income transfers towards Anglo-Saxon countries having a more pronounced inequality of earnings.
According to the survey, Finland is also one of the few countries where inequality of incomes has grown between the rich and the middle-class, and not only between rich and poor.
The results came as no surprise to Ilpo Suoniemi, a researcher at the Labour Institute for Economic Research.
”The change is a consequence of the tax reform in 1993”, Suoniemi reports.
In this post-recession reform the difference between the tax rates on earned income and capital income was made notably wide when compared with other OECD countries.
As a consequence, the differences between assessed incomes have been growing in Finland rapidly, while the disparities between gross earnings remain clearly smaller, Suoniemi notes.
In terms of net income, the earnings of the richest 1% of people have doubled in Finland over ten years, having grown from 3.5 % to 7 %. More than half of the earnings of this small group were in the form of capital income, of which the growth in dividend revenues was particularly high.
The taxation system encouraging income disparities was enacted under a non-socialist government. Since then the colours of governments have changed, but the legislation has not been amended, because politicians have feared capital outflow.
In Suoniemi’s view such a danger hardly exists today.
The upcoming recession could shrink the gap between rich and poor if companies’ ability to pay dividends weakens. On the other hand, unemployment is also likely to increase, and nothing increases income disparities as much as mass unemployment is bound to do.
Nevertheless, unless taxation is amended, the same trend, i.e. wider income inequality, will continue even after the period of economic decline.
Taxation is one of the key factors when it comes to the noticeable growth in income disparities in the entire OECD area, in which the gaps have grown in two-thirds of the member countries. However, the growth has been much slower in all other countries except for Finland.
The most distinct growth in income disparities has been noticed between rich and poor. In addition to Finland, only in Canada, Germany, Italy, Norway, and the USA has the gap between the rich and the middle class widened clearly as well.
Among ordinary people, some have been doing worse than some others. The income development of those who are approaching pensionable age or are retired already has been the best in relation to others.
The status of families with children has weakened, while single parents are in the worst position. Their likelihood to suffer from poverty is threefold compared with the average.
Many people do not regard the growth in earnings as bad at all. The OECD does not share that opinion.
”Ignoring the growing income disparities is not an option. It is a dangerous way, with inevitable social and political consequences”, says Secretary-General Angel Gurría, speaking at the launching event of the survey.
The key question at issue is to improve employment. Low education leads to unemployment, which in turn leads to poverty. The OECD urges governments to invest in the education of their labour force.
Organisation for Economic Co-operation and Development OECD
Labour Institute for Economic Research
Gini Coefficient (Wikipedia)