Economy of Finland - Taxation

Taxation

Tax is collected mainly from municipal income tax, state income tax, state value added tax, customs fees, corporate taxes and special taxes. There are also property taxes, but municipal income tax pays most of municipal expenses. Taxation is conducted by a state agency, Verohallitus, which collects income taxes from each paycheck, and then pays the difference between tax liability and taxes paid as tax rebate or collects as tax arrears afterward. Municipal income tax is a flat tax of nominally 15-20%, with deductions applied, and directly funds the municipality (a city or rural locality). The state income tax is a progressive tax; low-income individuals do not necessarily pay any. The state transfers some of its income as state support to municipalities, particularly the poorer ones. Additionally, the state churches - Finnish Evangelical Lutheran Church and Finnish Orthodox Church - are integrated to the taxation system in order to tax their members.

The middle income worker's tax wedge is 46% (NationMaster) and effective marginal tax rates are very high. Value-added tax is 23% for most items. Capital gains tax is 28% and corporate tax is 26%, about the EU median. Property taxes are low, but there is a transfer tax (1.6% for apartments or 4% for individual houses) for home buyers. Alcoholic beverages are separately taxed and highly restricted. For instance, McKinsey estimates that a worker has to pay around 1600 euro for another's 400 euro service - restricting service supply and demand - though some taxation is avoided in the black market and self-service culture. Another study by Karlson, Johansson & Johnsson estimates that the percentage of the buyer’s income entering the service vendor’s wallet (inverted tax wedge) is slightly over 15%, compared to 10% in Belgium, 25% in France, 40% in Switzerland and 50% in the United States. Tax cuts have been in every post-depression government's agenda and the overall tax burden is now around 43% of GDP compared to 51.1% in Sweden, 34.7% in Germany, 33.5% in Canada, and 30.5% in Ireland.

State and municipal politicians have struggled to cut their consumption, which is very high at 51.7% of GDP compared to 56.6% in Sweden, 46.9 in Germany, 39.3 in Canada, and 33.5% in Ireland. Much of the taxes are spent on public sector employees, many of which are jobs-for-life and amount to 124,000 state employees and 430,000 municipal employees. That is 113 per 1000 residents (over a quarter of workforce) compared to 74 in the US, 70 in Germany, and 42 in Japan (8% of workforce). The Economist Intelligence Unit's ranking for Finland's e-readiness is high at 13th, compared to 1st for United States, 3rd for Sweden, 5th for Denmark, and 14th for Germany. Also, early and generous retirement schemes have contributed to high pension costs. Social spending such as health or education is around OECD median. Social transfers are also around OECD median. In 2001 Finland's outsourced proportion of spending was below Sweden's and above most other Western European countries. Finland's health care is more bureaucrat-managed than in most Western European countries, though many use private insurance or cash to enjoy private clinics. Some reforms toward more equal marketplace have been made in 2007-2008. In education, child nurseries, and elderly nurseries private competition is bottom-ranking compared to Sweden and most other Western countries. Some public monopolies such Alko remain, and are sometimes challenged by the European Union. The state has a programme where the number of jobs decreases by attrition: for two retirees, only one new employee is hired.