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s a k·fi Goals Taxation and the economy

Prosperity-enhancing taxation and economic policies

The sustainability gap must be closed by tightening the tax base, with tax changes also considered in the spending limits procedure.

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The sustainability gap must be closed by tightening the tax base

Closing the sustainability gap caused by an ageing population is essential for safeguarding the welfare state. Instead of tax subsidies and tax deductions, we need a tightening of the tax base.

Achieving the objective

  • Employment measures alone will not suffice to close the sustainability gap, meaning that direct expenditure and tax measures will also be needed. Instead of spending cuts, the main emphasis must be on tax increases, especially on tightening of the tax bases for capital and wealth.
  • Unjustifiable tax subsidies and deductions should be abolished.
  • Tax subsidies related to the taxation of dividends from unlisted companies must be corrected. Aside from abolishing the maximum limit for capital income dividends subject to business tax relief, the reform is based on the 2017 report of the Expert Working Group on Corporate Taxation (2017).
  • Finland must play an active role when EU economic policy and the rules of the European Economic and Monetary Union are reformed in coming years.

Why is this objective important?

Closing the sustainability gap caused by an ageing population is essential for safeguarding the welfare state that is important to employees. The welfare state will be subject to continual cost-cutting pressures if the sustainability gap is not closed. Expenditure cuts should focus on such targets as subsidies to business and agriculture in order to avoid cutting back on such areas as research, education, social welfare and health care.

Tax subsidies complicate the tax system, as they make taxation less intelligible and transparent to individuals and businesses alike. There are too many tax subsidies, with no sustainable criteria for all of them from the point of view of resource allocation.

The current system is not efficient in terms of investment, productivity or economic growth. Investments are not targeted where they would yield the highest pre-tax returns. This reduces the productivity of labour. A reform would even out disparities in the tax treatment of tangible and intangible assets and improve tax neutrality, meaning that taxation would not distort business decisions. The challenge is conversion of income from earned income into capital income. The current model incorporates an incentive to withdraw income earned from work in the form of dividends. The tax advantage creates a listing threshold, meaning that it reduces the incentive to become a listed company.

The economic policy of the European Union and the rules of European Economic and Monetary Union will be reformed in coming years. By participating actively and constructively in these reforms, Finland can help to ensure that the solutions are conducive to strengthening the economy of Europe and, by extension, the economy of Finland as well. This would also be the best way to defend those aspects of the Finnish labour market and social welfare system that the European Union is not seeking to influence.

The spending limits procedure for the State budget must accommodate changes in taxation

This may prevent situations in which tax subsidies that exceed the spending limits are recommended, even though some other approach would have more impact and be more efficient.

Achieving the objective

  • The spending limits procedure must realistically describe the national ratio of income and expenditure, and must accommodate the changes made to taxation as well as expenditure.

Why is this objective important?

This may prevent situations in which tax subsidies that exceed the spending limits are recommended, even though some other approach would have more impact and be more efficient. This is relevant, for example, in RDI and climate policy.

The social dimension of sustainable development must be strengthened

Besides economic realities, the budget procedure for sustainable development only assesses environmental impacts. This is not sustainable and it needs to be changed.

Achieving the objective

  • An assessment of social sustainability must be added to all aspects of the State budgeting cycle.
  • The staffing and operating cost resources of the Sustainable Development Secretariat at the Prime Minister’s Office must be increased.
  • Alternative indicators of wellbeing and social sustainability must be strengthened. These indicators will be used to support policymaking.

Why is this objective important?

Besides economic realities, the budget procedure for sustainable development only assesses environmental impacts. Incorporating a social sustainability assessment into the budget procedure would give policymakers additional instruments for assessing the social sustainability impacts of their decisions more effectively.

Staffing of the Sustainable Development Secretariat at the Prime Minister’s Office has been reduced in recent years. Funding allocated to operating costs has also been cut. These cuts undermine implementation of the Agenda2030 roadmap and strategy, and the availability of high-standard sustainable development research.

GDP is a narrow indicator of wellbeing. For example, it fails to consider income differentials or the longer-term sustainability of production. Indicators that pay more comprehensive attention to human wellbeing must be developed to support policymaking.