Taxation task force wants to cut back on tax deductions
Higher property tax proposed, tax breaks on dividends to be cut
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A working group set up to reform taxation in Finland has set as its goal the establishment of as wide a tax base as possible. In practice this means ending various tax deductions, which allow people to get some types of income tax-free.
It is expected that the working group will call for the taxation of profits on the sale of one’s own home. Now a home can be sold tax-free if the seller has lived in it for at least two years. The working group is also expected to propose the elimination of the tax deduction on the interest paid on housing loans.
The working group is also taking a look at other tax-based subsidies. One possible deduction to be eliminated could be the household work deduction aimed at encouraging home owners to hire assistance for repairs, or for home cleaning.
“After the recession, it might no longer be justified”, said the group’s chairman, Martti Hetemäki, a high-ranking Ministry of Finance official.
The state loses about EUR 10 billion in tax revenues through various tax breaks each year. This year the state is borrowing about the same amount. Without tax deductions, the state could collect about a quarter more in tax revenue.
By expanding the tax base through the elimination of gaps caused by various tax deductions, it is possible to lower the tax rate - the percentage of their income that taxpayers have to pay the state.
The group is not expected to propose that all tax deductions be eliminated. For instance, the biggest tax break, the right to live in a home that a person owns him, or herself, is unlikely to be changed.
“Ordinary people do not understand the idea that living in their own home constitutes income of some kind, or that this income might be taxed”, Hetemäki concedes.
It would also be difficult to eliminate various deductions related to earning income, because the deductions have been created to make the work of low-income earners worthwhile.
The deputy chairman of the group, Heikki Niskakangas says that they have the possibility to propose the elimination of no more than about 30 different deductions. That is about how much deductions were eliminated in the tax reforms of the late 1980s and early 1990s.
“Since then, the number of deductions has gradually increased. Culture vouchers and transport vouchers come a few times a year”, Niskakangas says.
In addition to eliminating deductions, the working group has agreed that consumption taxes, such as value-added tax, the tax on alcohol, the car tax, the rubbish tax, and the dog tax should be increased.
Increasing the taxation of consumption tends to accentuate income differences, because contrary to the income tax rate, consumption taxes do not vary according to the income of the taxpayer. Hetemäki says that this will be taken into consideration somehow in the taxation of income. Ways to reach this goal are currently under consideration.
The working group also feels that the property tax should be increased, but the amount remains open.
The working group plans to make changes in the taxation of capital gains income at least to the extent that there should be ways to prevent the deliberate conversion of earned income into capital gains income.
A change is coming at least to tax-free dividends. Now the owner of an unlisted company, which has paid the 26 per cent corporate tax, can cash in EUR 90,000 in tax-free dividends, if the company has sufficient funds. The working group is pondering if the tax-free limit should be brought down, or if the tax-free status of the dividend income should be eliminated completely.
The corporate income tax rate is to be kept at the present 26 per cent, or brought down to 25 per cent.
The working group was set up last autumn by Minister of Finance Jyrki Katainen (Nat. Coalition Party). It has until the end of next year to put forward its proposal for reform of the tax system.
Helsingin Sanomat
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| 8.9.2009 - TODAY |
 Taxation task force wants to cut back on tax deductions |
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