Working group wants lower corporate and income taxation, higher taxes on consumption and capital gains

Implementation to be left to next government

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A working group headed by Undersecretary of State Martti Hetemäki of the Ministry of Finance is calling for cuts in the taxation of earned income of about EUR 2 billion, and for EUR 400 million in reductions in corporate and capital gains taxes.
      The reduction in income taxes would have its greatest impact on those who earn the most. According to the proposal, the tax on additional income would be reduced in all income groups. The highest tax rate would come down to 50 per cent.
     
The tax cuts would be partially offset by raising VAT on products and services by two percentage points. The working group calculates that this would bring an additional EUR 1.3 billion into state coffers.
      However, after the tax cuts there would still be a gap of another EUR 1.2 billion to make up.
      The Hetemäki task force promised to say in its final report, due for publication in December, how that gap would be bridged.
     
The government parties were cautious in their reactions to the proposals. The new Prime Minister Mari Kiviniemi (Centre) described the proposal as a “base for discussions”.
      She pointed out that the group has not yet completed its work, adding that if the proposals were implemented as such, the result would be a huge gap in the budget.
     
“What is most important in taxation and in reforming it, is support for growth and employment. Equally important is the fair treatment of citizens”, Kiviniemi says.
      Minister of Finance Jyrki Katainen (Nat. Coalition Party) agrees. “Enacting big tax reform in this time of uncertainty is truly risky, and we do not want to take that risk”, Katainen said. A comprehensive tax reform will be up to the next government, which takes office after next year’s Parliamentary elections.
     
Opposition parties criticised the proposal. Jouni Backman, a taxation expert at the Social Democratic Party, feels that the reduction in corporate taxation, which the report proposes, would increase the deficit in the public economy. He also criticises the focus on reducing taxes among those with higher incomes.
      “If there is any possibility to reduce taxation on earned income, it should focus on those with low and medium incomes. Cutting higher marginal taxes would mean that the progressive nature of income taxes would be reduced, and there is no basis for that if the aim is to ease income differences or promote incentives”, Backman said.
      Left Alliance chairman Paavo Arhinmäki sayd that this is the time to increase tax revenue, and not to reduce taxation.
     
Economists Markus Jäntti and Matti Tuomala see the proposals as one-sided and poorly explained. The group proposes shifting the focus of taxation away from the taxation of work.
      “The working group’s rhetoric on decreasing the tax burden is inaccurate. Raising VAT on services means the same thing as increasing taxes.”
      “The aim of this kind of rhetoric is simply to implement the political goals of the working group. Work by civil servants should always be balanced and independent”, says Jäntti, a professor of economics at the University of Stockholm.
     
In its report the working group quotes a study by economists Alberto Alesina and Silvio Ardagna, who say that historically, reducing public deficit through spending cuts has led to more sustained results than using tax increases as a means of balance.
      Professor Tuomala suspects that members of the working group might not have read the conclusions of that study.
      “The researchers make the point that their model cannot be applied in the present situation in which interest rates are near zero. In addition, many scientists, including Paul Krugman, have shot down the conclusions of the study. The taxation working group, on the other hand, has taken the study as its guiding light, as it were”, Tuomala says.


Previously in HS International Edition:
  No major tax reform this electoral term (21.6.2010)
  Finland chastised by EU Commission on excessive deficit (16.6.2010)
  Kiviniemi government to seek more tax revenue (15.6.2010)

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