Present government’s tax reductions focusing on people with low incomes

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The government and the opposition have long been arguing which one of the Finnish governments of recent times has been the most ”social”, in other words the most just and most beneficial to people with low incomes.
     
The present government naturally boasts that their own policy is the most social, while the largest opposition party, the Social Democratic Party, claims that the government has mainly relieved the taxation of the wealthy, ignoring those with low incomes.
      Who is right?
      Actually the composition of the government has had hardly any impact on the income taxation policy, as all governments following the depression in the 1990s have eased the taxation on work nearly every year.
      Instead of looking into the general tax reduction principles, Helsingin Sanomat decided to compare how the tax reductions have affected people in various income brackets.
      The comparison was conducted by the Pellervo Economic Research Institute (PTT), which has close connections with the Centre Party.
     
When looking at the taxation of employees, the previous government of Prime Minister Matti Vanhanen (Centre) focused a larger part of its tax reductions on people in a lower income bracket compared with the tax reductions implemented by the present government.
      Matti Vanhanen’s current government, whose Minister of Finance is a member of the National Coalition Party, has reduced the taxation of people with low incomes by 0.4 percentage points more than that of high-salary employees.
      In comparison, Vanhanen’s previous government, with a Social Democrat as the Minister of Finance, reduced the taxation of low-salary employees by 1.0 percentage points more than that of people with high incomes.
      In other words Vanhanen’s first government wins this game in the competition over ”sociality”.
     
However, the picture of the social taxation policy is different, if the low income bracket includes not only those who have jobs but also those who are unemployed or live on social benefits.
      In addition to the changes made to the income tax schedule, the taxation of those people with jobs has been reduced by increasing the earned income tax credit. Moreover, the tax-deductible amounts relating to travel expenses and earnings related costs have also been raised.
      However, these tax deductions can only be made from earnings, which is why they do not apply to unemployed persons.
     
In fact, the tax credits for the working population have been improved nearly every year since 1997. Compared with the tax rate of earned income, the taxation of those people who live on social benefits has been stepped up constantly.
      People living on social benefits are qualified to receive a basic allowance, which has not even been adjusted for inflation for many years.
      In August, the present government decided to increase the basic allowance for benefits from EUR 1,480 to EUR 2,200 a year from 2010. The decision will ease the taxation of many people who are living on benefits. For example, those who live on the basic allowance (EUR 553 per month) will get a tax deduction of 2.5 percentage points, equalling to approximately EUR 175 per year.
      The previous increase in the basic allowance was made in 1991.
      The winnner in this competition over the most social administration is Matti Vanhanen’s present government.
      However, researcher Pertti Honkanen from the Social Insurance Institution of Finland points out that the increase in the basic allowance is equal to the inflation that has been running from 1991.
      ”It could have been increased to a more realistic extent; the sum is modest and will not change the world much”, Honkanen notes.
     
In addition to Vanhanen’s governments, Helsingin Sanomat included in the comparison the two previous governments.
      When it comes to the taxation policy, Paavo Lipponen’s (SDP) two governments pulled in different directions. His first term as Prime Minister (1995-1999) reduced the tax burden of people with high and middle incomes more than that of people with low incomes.
      During Lipponen’s second government (1999-2003), the focus on tax relief was on low-salary employees.
      ”Now the SDP claims that the public revenues are being wasted on tax reliefs, even though Lipponen’s both governments eased the burden of income taxation more than Vanhanen’s governments ever have”, says Pasi Holm, the Managing Director at PTT.
     
The adjustments in taxation are not mere politics, but they also reflect economic cycles. For example, Lipponen’s governments acted in boom periods, when the unemployment insurance contributions declined, easing the tax burden.


Previously in HS International Edition:
  SDP wants to extend tax progression to dividends (4.9.2009)
  Taxation of low income-earners in Finland below European average (17.8.2006)

Links:
  Pellervo Economic Research Institute (PTT)

Helsingin Sanomat