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OECD Economic Surveys: Finland 2002

image of OECD Economic Surveys: Finland 2002

This 2002 edition of OECD's periodic review of Finland's economy includes special features on options for reforming the Finnish tax system and policies to boost potential output growth.

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Options for Reforming the Finnish Tax System

Finland is among of the most egalitarian countries in the OECD. Generous welfare services and large transfers aim at a high degree of income redistribution, but a high tax burden is required to finance the associated public spending. The tax system has also been designed to compress the already rather flat primary income distribution further. However, like the other Nordic countries, to stem tax base erosion, Finland radically reformed the taxation of the most mobile tax bases in the early 1990s. Capital and corporate income taxation has been streamlined, through significant rate cuts cum base broadening measures. However, high taxes, especially on labour income, still hamper growth potential, give rise to tax arbitrage and distort economic behaviour. In this respect, the poor performance of the Finnish labour market is revealing. The tax system, and its interaction with social transfers, has undermined work incentives and contributed to the emergence of serious labour shortages for highly qualified workers. At the same time, high non-wage labour costs have hindered employment creation. Pockets of very high unemployment still exist, even though activity has been very strong for several years, while some companies have moved part of their business to countries where costs are lower partly because of taxes. Addressing concerns about the increasing cross-border mobility of tax bases while keeping high quality public services and a fair amount of income redistribution will thus be key issues in reforming the Finnish tax system.

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