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Tax Working Group reform proposal: Towards taxation supporting employment and growth

21.12.2010  |  Press release 167/2010

The working group proposes a modest shift of emphasis in taxation from taxation on work to taxa-tion on consumption, while not forgetting the income distribution effects of the change. In addition, a shift of emphasis from corporate income taxation to personal-level capital income taxation is pro-posed. In the proposal, the reduction of taxation on earned income is EUR 2 billion and the reduction of corpora-te income tax EUR 0.8 billion. The reduction would be financed by increases in value-added taxation and capital taxation, by raising excise duties and by restricting deduction of interest expenses and tax credit for domestic help. Excluding any positive impact on employment and growth, the short-term effects on revenue of the tax increases and reductions are of equal magnitude.

Especially in the long term, ageing population will exert pressure to increase taxation on work, par-ticularly through municipal income tax and employment pension contributions. High employment and productivity growth will play a key role in ensuring the sustainability of general government finances.

Reductions of taxation on earned income will be targeted at earned income to achieve employment and productivity targets. The average tax rates on earned income will be lowered at all income levels, which will encourage participation in work, increase skills and lengthen working careers at their differ-ent stages. The reform proposals for corporate and capital income taxation aim to increase the effec-tiveness and profitability of investments made in Finland. A further goal is to reduce incentives to in-come shifting. The working group's proposals on real-estate taxation and consumption taxation shift the emphasis of taxation towards permanent and stable tax bases.

The working group's proposal in brief:

?                    Taxation of earned income would be reduced by around EUR 2 billion. Marginal tax ra-tes would be lowered at all income levels. The average tax rates at the lowest and highest in-come le-vels would be reduced more.The marginal tax rates at the highest tax levels would be lowered to around 50%.

?                    The basic tax rate and the two reduced tax rates of value-added tax would rise by two per-centage points. In value-added taxation, however, the goal in future would be towards a more uni-form structure.

?                    With respect to excise duties, both energy and environmental taxation and taxation of products harmful to health (health taxes) would be increased by around EUR 1 billion.

                        - Increases would be directed in terms of energy and environmental taxes to the basic tax on motor vehicles, the tax on consumer electricity, and transport and heating fuel taxes. A windfall tax on electricity production would be introduced.

                        - Health taxes (excise duty on soft drinks, excise duty on sweets and ice cream, tax on al-cohol) would be increased. The tax base of the excise tax on sweets and ice cream will be broadened. The introduction of a sugar tax will be explored.

?                    The corporate income tax rate would be reduced from the present 26% to 22% and the general tax rate on capital income raised from 28% to 30%. The tax exemptions of divi-dends received from an unlisted company would be removed and replaced with reduced taxation of the normal return of the dividend. This would be implemented such that the tax rate (company and shareholder) of the normal return of the profit distributed by a company corresponds to the general capital income tax rate. Dividends received from publicly listed companies would be fully included in taxable capital income.

?                    The proportion of deductible interest expenses on housing loans would be gradually re-duced by five percentage points per year. Thus after four years, 80% of interest expenses on housing loans would be deductible. In the long term, it is justified that the right to deduct housing loan interest be removed.

?                    In local government taxation, the share of corporate income tax revenue would be trans-ferred to the central government. Municipalities would be compensated for revenue losses arising from this primarily via the system of central government transfers to local govern-ment.

?                    The development of the equalisation system and the system of central government trans-fers to local government will be reviewed to ensure that municipalities would have better opportunities to use the real-estate tax. The objective is to raise real-estate tax revenue by 50%, which would mean an increase of tax revenue by around EUR 600 million.

?                    The emphasis of the real-estate tax would be transferred gradually to a land tax, and tax rates determined for land separately. The lower limit of the tax rate on land would be raised 0.2 per-centage points to 0.8%. The upper limits of real-estate rates would be removed, exclud-ing power plants and other housing construction. With respect to agricultural and forest land, the preconditions for real-estate taxation will be reviewed.

?                    In inheritance and gift taxation, the limits at which the 10% and 13% tax rates apply would be raised. In addition, a new 16% tax rate could be introduced, directed only at very large in-heritances and gifts. Exceptions relating to the valuation of life insurance savings and cor-porate assets in inheritance and gift taxation would be removed.

?                    With respect to the tax credit for domestic help, the deduction system would be reformed such that tax deductible share of work costs is reduced from the present 60% to 50%. The maximum amount of the deduction would also be reduced from EUR 3,000 to EUR 2,300.

 

Further information: Permanent Under-Secretary Martti Hetemäki, tel. 358 9 160 33091

 

 

 

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