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Study: Finland’s tax regime discourages earning more, seeking better-paid work

Finland’s high marginal tax rate – the tax paid on additional income – begins to bite at even low income levels, says a taxpayers’ association study.

Image: Vesa Moilanen / Lehtikuva
Yle News

The taxpayers’ association has blamed Finland’s high marginal tax rates for discouraging people from seeking better-paid work or additional sources of income. The organisation noted, however, that taxes on low incomes are lighter in Finland than in other European countries it analysed.

"In Finland as well as in other parts of Europe, recent taxation policy has taken a more supportive turn in alignment with economic growth and employment. However steep progressive and marginal taxation remain a stubborn aspect of salary taxation in Finland," said Mikael Kirkko-Jaakkola, the organisation’s head economist.

In an interview on Yle Radio 1’s Ykkösaamu programme Kirkko-Jaakkola noted that Sweden was slower to hike progressive taxation. The association’s analysis of tax regimes in Europe revealed that in Finland, employees' tax rates begin to skyrocket from very low income levels as pay packets rise to the middle income stage.

The average annual pay in Finland is 43,000 and income earners pay up to 2.1 percentage points more than other European taxpayers in the comparison. At the top end of the comparison, people earning 140,000 euros annually in Finland have to fork out on average 6.9 percentage points more taxes than their peers in other countries in the study.

The organisation concluded that because of Finland’s high marginal tax rate -- the tax paid on additional income -- begins to bite at even low income levels, it is not worthwhile to earn additional income or seek better-paid work.

However Kirkko-Jaakkola pointed out that tax rates on lower incomes in Finland are quite competitive compared to other European countries.

"It may even be below the average level of comparative European countries." he added.

Income taxes easing in recent years

Last year Finland moved to ease income taxes at all income levels for the first time since 2009, the association noted. On top of that, the government’s competitiveness pact negotiated with labour marker organisations reduced employers’ statutory contributions.

The trend to lighter taxation on incomes continued this year as employer contributions continued to fall. Other European countries with higher tax rates than Finland include Belgium and Germany.

However the economist noted that progressive tax rates in these countries are not as steep as in Finland, although income taxes may be higher across all income levels.

In addition to income levels, tax rates are affected by variables such as whether or not an income earner has a family.

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