Panel: higher tax takes joy out of extra income
When ward nurse Helvi Hietanen sacrifices a Saturday, or a weekday evening to giving lectures, she is able to keep about half of her lecture fees. Taxes take 48 per cent of the additional income.
Hietanen gets to keep over two thirds of her regular pay from the plastic surgery ward at Töölö Hospital.
The tax rate for extra income from work outside a person’s regular job is taxed at a higher rate.
This marginal tax is paid on income stemming from pay increases, extra jobs, or greater than expected overtime work. The higher the pay, the higher the percentage. In Hietanen’s case, the rate is 48 per cent.
“My own feeling is that small pay increases are cancelled out by taxes”, Hietanen says.
She is quite happy to pay a quarter of her income in taxes - at least in theory.
“I understand that it is possible for a tax rate to be too low. I also want there to be enough tax revenue for social services and health care, and to take care of the weakest.”
The gap between the regular and additional tax rates are evened out at the end of the tax year. The supplementary rates compensate for taxes that were not paid in the early part of the year. In any case, the marginal tax shows how steep progressive taxation is.
In Finland, taxation becomes significantly cheaper as income rises, even among those with medium incomes.
Finland is no exception in this respect. In 1976, Swedish children’s author Astrid Lindgren saw her marginal tax rate rise to 102 per cent, which prompted her to write a story about it. The case raised a big controversy in Sweden, and the Social Democrats were voted out of the government in Parliamentary elections that same autumn.
The impact of themarginal tax is clear to Hietanen, as ward nurses earn between EUR 35,000 and 40,000 a year.
“Additional income is not reflected in the pay that one gets in hand. It does not provide an incentive for a person to take any extra work”, Hietanen says.
In saying so, Hietanen sums up one of the greatest problems of the Finnish taxation system - a view shared by a number of experts on a panel set up by Helsingin Sanomat.
The lack of incentives for work is one major reason why Finland is working on an extensive reform of the taxation system.
The working group is headed by Martti Hetemäki, and it is expected to be working on a reform proposal for some time.
Helsingin Sanomat set up its panel to comment on the issue now. They include Heikki Niskakangas, Professor of Tax Law at the Helsinki School of Economics and Business administration, as well as Dr. Jaakko Kiander of the Labour Institute of Economic Research, Pauli K. Mattila of the Central Chamber of Commerce, and Dr. Martti Hetemäki of the Ministry of Finance.
The biggest problem seen by the panel was the discrepancy between the fairly high level of taxation on earned income compared with the fairly low tax on capital gains income. The system allows certain groups of professionals, ranging from construction workers to doctors, to avoid taxes by turning some of their earned income into income from dividends, which is taxed at a lower rate.
Niskakangas says that the most serious problem is that it is possible to get dividend income from an unlisted company tax-free for up to EUR 90,000. On the other hand, the highest marginal tax rate for earned income is over 50 per cent. He proposes reducing the highest marginal income tax rates, and the inclusion of income from all dividends to taxation.
The marginal tax of up to 56 per cent is seen to serve as a disincentive for creativity and harder work.
“The higher know-how is taxed, the less know-how is created”, Hetemäki says.
“You can hear people say it: the amount of pay that they take home does not decrease much with less work”, says Mattila.
The array of tax deductions, for instance, on interest paid on home loans, for household improvements, and for those taking on additional personal pensions, is seen to distort the system, while depriving the state of more than EUR 10 billion a year.
Martti Hetemäki sees this as a “parasite of the taxation system”, which pushes up the overall tax rates.
Jaakko Kiander sees it as a blemish on the taxation system, but he would not want to give it up. “The deduction of interest on home loans helps families with children, who are in a tough spot anyway.
There have also been calls for cutting the 26 per cent tax on corporate income, which brings the state about EUR 7 billion a year.
Professor Niskakangas notes that the tax is the only one in which Finland faces open international competition on taxes. “However, Finland should not be an active adapter in taxation, and not an aggressive competitor. He adds that the tax level should be kept at about the level that it is in Finland’s closest competitors, or slightly below.
Pauli K. Mattila notes that companies show their profits where the tax rate is lowest. “That is why Nokia pays 70 per cent of its taxes in Finland, although Finland comprises barely one per cent of the company’s turnover.
“The trend is downward. Sweden already came very close”, Mattila adds.
The inheritance tax, which can be up to 26 per cent, has long been an incentive for tax planning and the development of many ways to avert the tax. This tends to promote inequality.
Another complaint is that the tax has to be paid even if the recipient has not taken control of the capital or property.
Heikki Niskakangas is in favour of the inheritance tax, and feels that large inheritances could be taxed even more heavily than they are now.
Kiander feels that the spouse of a deceased person is sometimes put in an unreasonable position. He would like to see more flexibility. “An underage child can get a bill for EUR 50,000 for immediate payment, even though he or she does not have control of the house, and is not allowed to sell it”, Kiander laments.
“The tax has its place, but issues of reasonableness need to be taken care of”, Hetemäki says.
Helsingin Sanomat
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| 17.12.2008 - TODAY |
 Panel: higher tax takes joy out of extra income |
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