NEWS ANALYSIS: Stopping growth in tax progression would be something new

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By Hanna Kaarto
     
     Tax progression has been a key political theme of the late summer. In fact, it has ultimately been discussed only at a superficial level. At times, there has been an unsettling feel of ranting in the tax debate.
     The Social Democratic Party, the Left Alliance, and the Greens have all been calling for a focus on small and medium income-earners when taxes are reduced.
     The National Coalition Party has offered tax cuts of EUR 800 million to all, and a tax break targeting low, and medium income-earners which would compensate for the loss of an earnings deduction in state taxation. The Centre Party supports this model.
     
It is not quite clear if the parties of the opposition would like to leave those with high incomes completely without tax cuts, how low and medium-incomes are to be defined, and how tax cuts would be allocated to these groups.
     At least some opposition parties are planning to publish an alternative budget later in the autumn, at which time the matter is likely to get more clarity.
     In the midst of the confused debate it is possible to pick out a clear ideological difference between the centre-right parties and the left in their attitudes toward progressive taxation.
     
Progressive taxation means that the higher a person’s income, the higher the tax rate.
     In the language of the Social Democratic Party, progressive taxation is justified by the notion that paying taxes is based on the “capacity to pay tax”. In the political right, some are hankering for a flat tax rate, which does not “punish” anyone for earning a high income.
     Minister of Finance Jyrki Katainen (Nat. Coalition Party) has emphasised time and time again that the progressive nature of taxation must not be increased. Prime Minister Matti Vanhanen (Centre) said on Monday that he is adhering to the same principle.
     This is something new; at the time of Vanhanen’s first government, in which the ministers of finance were Social Democrats, progression in taxation was made steeper, as it has during the whole post-recession period, while taxation has been eased.
     This means that the taxation of high-income taxpayers has been decreased less than that of those with low incomes.
     When Paavo Lipponen (SDP) was Prime Minister - a time when the Minister of Finance was from the National Coalition Party - the increase in tax progression was even steeper.
     A model is under preparation at the Ministry of Finance in which the taxation tables are being changed in such a way that those with low incomes - some of whom do not even pay state taxes, will get a labour income deduction, under which everybody gets a tax cut of the same size.
      Experts say that the cut can be implemented in a way that does not lead to steeper tax progression, by manipulating the tax scale a bit. Similar exercises have been done before.
     
Taxes have been brought down after the recession of the 1990s at an even pace. Tax cuts for those with low incomes have been on a slightly steeper downward curve than those for medium and high incomes. Tax progression has increased, although not by very much.
     A table put out by the Taxpayers’ Association of Finland compares four different income groups involving people who work full-time.
     Taxes for the lowest group have been reduced by 7.7 percentage points since the mid-1990s, and those of the highest by 6.7 percentage points.
     
Now the National Coalition Party and the Centre want to stop this trend. The aim is to reduce taxation of the rich by as much as that of those with low incomes. This is not a dismantling of progression yet, but rather keeping it unchanged.
     Katainen hints that the government might make moves toward dismantling tax progression.
     
The stage is set for ideological taxation debate for the whole government term. The debate will require well thought-out statements from the opposition as well.
     
Helsingin Sanomat / First published in print 22.8.2008


Previously in HS International Edition:
  Budget: Finance Minister Katainen proposes EUR 800 million in tax cuts (1.8.2008)
  OECD criticises Finnish taxation and pension policy (4.6.2008)

HANNA KAARTO / Helsingin Sanomat
hanna.kaarto@hs.fi