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Economist: Finnish tax policy creating a class of super rich

Finland is seeing the growth of the super rich, whose lightly-taxed capital income far outstrips other groups' earnings.

Sijoitusmessut Helsingin Messukeskuksessa.
Taloustieteen professori Matti Tuomala pitää suomalaisen verotuksen suurimpana epäkohta edelleen sitä, että keskimääräistä verotaakkaa voidaan alentaa siirtämällä tuloja verotettaviksi pääomatuloina. Image: Laura Railamaa / Yle
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Finnish tax policy favours the accumulation of wealth among the country’s richest people, Tampere University professor Matti Tuomala saidjust one day before the tax administration Vero reveals the names of the country's top income earners.

Current tax policy has created a cohort of about 50,000 people that now includes the likes of game firm entrepreneur Mikko Kodisoja and cyber security firm F-Secure chair Risto Siilasmaa, Tuomala noted.

On top of that, the researcher has identified another group of roughly 5,000 super rich people, whose wealth accumulation is in a class of its own, according to public data. They live primarily on capital income.

"When we talk about the top one percent of taxpayers, they are in a class of their own, and even more so if we look at the top one thousand," Tuomala declared.

Tax burden shrinks as capital income grows

Tuomala and his research team analysed Finnish tax policy since the 1990s and concluded that a major problem in Finnish taxation is the fact that individuals can ease their average tax burden paying taxes on capital income rather than earned income.

Capital income and dividends from shares carry a relatively lower tax rate than wages and salaries. As a result, people have increasingly shifted income sources to limited liability companies and possible holding companies.

Affluent owners of non-listed companies can also withdraw large sums of tax-free dividends from the firms they’ve invested in. And on top of that, Finland abolished a wealth tax about 10 years ago.

Tuomala’s research group found that the larger the proportion of capital income in the overall income of the super rich, the less tax they pay.

Studies have shown that for a long time, the average tax burden of the richest one percent in Finland has been significantly lower that than that of the top ten percent.

Wealthy accumulating capital rather than investing

On the other hand, the average tax rate has been rising since 2011 and is now around 35 percent, largely the equivalent of income taxes paid by middle income earners.

"Our tax system is rather unusual in that your tax burden is largely determined by the composition of your income," Tuomala, summed up.

He said that he is worried about the fact that the current tax regime encourages the wealthy to accumulate capital rather than to invest in new equipment or products.

"From the business perspective, it encourages investment in non-essential matters such as property and securities."

A finance ministry tax working group has drawn the same conclusion, given that the rate of investments in Finland has been declining in recent years.

No tax evasion research in Finland

The Tampere University professor said that income taxes should return to a progressive income tax model. He added that the tax rate should take account of total income, including wage and capital income. He recommended at least hiking taxes on capital income.

Mika Kuismanen, head economist of the Federation of Finnish Enterprises, said that the focus of the current tax structure should not change because of a small group. Rather he noted that the gap has been caused by wider developments in the global and Finnish economies.

"I see a positive side in this in that it’s not just about old money, but that hard-working and innovative people have a chance to really advance in terms of income and wealth," Kuismanen declared.

He noted that in recent years new names, especially in the IT sector, have joined the ranks of the super rich.

In his book "Markets, the state and inequality" Tuomala cites Nordic research concluding that the rich are more likely to avoid paying taxes. The research, which was published in an influential economics journal, reviewed sources such as the information revealed in the Panama Papers data leak.

Researchers concluded that the top 1,000 wealthy people evade taxes many times more than is generally the case with people who pay personal taxes.

Tuomala pointed out that tax evasion is one example of how due to insufficient data, income equality trends in Finland are underestimated. He also noted that similar research on tax evasion has not been conducted in Finland and that wealth comparisons are more difficult that income analyses.

He estimated that significant amounts of wealth are hidden in holding companies as well as insurance portfolios.

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