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OECD Advises Finland On Growth-Friendly Tax Reforms

by Ulrika Lomas,, Brussels

02 August 2016

A revenue-neutral modification of Finland's tax structure could boost the nation's economic growth, the Organisation for Economic Cooperation and Development said in a recently released report.

Finland has already adopted some measures to make the tax structure more growth friendly in recent years, the report, Boosting Productivity in Finland, said. These measures include lowering the corporate income tax rate from 26 percent to 20 percent in three steps between 2011 and 2014, with the aim of maintaining an attractive business environment. In addition, the share of indirect taxes in the tax mix has increased, with hikes to both value-added tax (VAT) and excise duties. Meanwhile, recurrent taxes on personal immovable property have increased, but these remain relatively low.

Despite the recent reforms, the tax structure can be improved further, the report said. The report pointed out weaknesses in the current tax structure, advocating a review of reduced VAT rates on some categories of products, which increase the burden of compliance and reduce revenue substantially. In addition, taxation on labor remains high by OECD standards, says the report, weakening work incentives for individuals and incentives for employers to hire workers.

The report adds there is also a case for reducing the many tax expenditures, as these create complexity in the tax system, are often poorly targeted, and risk being used to circumvent government spending limits.

The OECD noted that the Finnish Government has announced a reduction in labor taxation, notably through an increase in the earned income deduction focusing on those on low and medium incomes. In addition, excise duties and recurrent taxes on personal immovable property, which are less detrimental to growth, will increase. The deduction of mortgage interest rate payments from taxable personal income will be reduced further. Some reforms to taxation of entrepreneurship, ownership, and investment are also planned. This includes easing the inheritance tax, which would however entail revenue losses and increase inequality, the OECD said.

TAGS: individuals | inheritance tax | environment | compliance | VAT rates | tax | investment | economics | business | value added tax (VAT) | property tax | interest | fiscal policy | entrepreneurs | Organisation for Economic Co-operation and Development (OECD) | Finland | tax reform | standards

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