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Week 3/2011: Taxes discounted — since 1995

The significance of the share levied through income taxation in funding government spending has considerably decreased in the last 20 years. At the same time, evening out the income distribution on the progressive scale has decreased. This is reported by Juhani Turkkila in his dissertation in Economic and Social History, publicly examined this month.

The sub-heading of Turkkila’s dissertation is “60 years on the tax rollercoaster”. He studied the actual changes in the income taxation of wage earners during 1948–2008, that is, the variation independent of price increases. “Income taxation was reduced after the war, but an increase started in 1960, continuing up to 1975. Now the reductions have continued without stopping since 1995,” says Turkkila.

The decline in income taxation was triggered by the extensive overall taxation reform of 1989. Since then, income tax rates have been decreased, the number of income categories of taxable income has been reduced, the income category limits have been increased, and marginal tax rates have been decreased.

Despite the considerable decreases in income tax rates, those with a large income continue to be very eager to change their earned income to capital income. Large capital income is still taxed less than large earned income.

“It is difficult to measure the precise reduction sums. However, as a result of the changes, the number of those governed by progressive income taxation has rapidly decreased.” The number of the taxable in 1989 was about 2.8 million, but only 1.7 million in 2009.

For his dissertation, Turkkila developed an indicator measuring the connection between the tax rate change and the relative change of income. According to Turkkila, the indicator provides more reliable information about tax rate increases and decreases than just comparing the income tax rates.

Text: Matti Ylönen
Photo: Archive of National Board of Taxes

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