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OECD Urges Finland To Broaden VAT Base, Cut Labor Taxes

by Ulrika Lomas,, Brussels

07 March 2018

The OECD has recommended that Finland reduce its high tax wedge on labor and shift the burden of taxation towards indirect taxation, property taxes, and environmental levies.

The OECD said in its latest Economic Survey of Finland that the high tax wedge discourages participation in the labor market, with employment rates in Finland generally lower than other OECD countries.

"The combination of different working-age benefits, childcare costs and income taxation creates complexity, reduces work incentives, and holds back employment," the OECD said.

Therefore, tax reforms which reduce taxes on labor and shift the burden to other forms of taxation, in particular value-added tax and property tax, could shore-up the revenue base in a growth-friendly way, the report concluded.

In particular, the OECD argued that there is room for Finland's VAT base to be widened by decreasing the scope of reduced rates.

"Finland has a 24 percent standard VAT rate, which is among the highest in the OECD, but a number of goods and services are taxed at lower rates. A 14 percent rate applies to food and restaurants. A 10 percent rate applies to a wide range of items, including books, pharmaceutical products, accommodation, passenger transport services, and some sport and cultural activities," the report observed.

As a result, the Finnish VAT system is somewhat less efficient than consumption tax systems in other OECD countries, the report said.

"The relatively low efficiency of Finnish VAT is mainly related to exemptions and reduced rates, as compliance is high. Reduced VAT rates cost about EUR2bn (USD2.5bn) in 2014 and are the second largest tax expenditure after the total of deductions related to income taxes."

"Furthermore, having several VAT rates generates administrative and compliance costs," the report said. "This calls for narrowing the number of goods and services subject to reduced rates. Another option would be to tax all products subject to reduced rates at 14 percent, instead of taxing some at this rate and others at 10 percent."

The expected adverse impact of such a measure on low-income households could be offset by reducing taxes on low incomes, the report suggested.

In addition, the report argued that recurrent taxes on immovable property are generally considered as among the least harmful to economic growth. "Nevertheless, property tax revenue remains below the OECD average" in Finland, it said.

"Residential property taxes are also regressive, as municipalities with high average incomes tend to set lower tax rates. Hence, there seems to be potential to raise a larger share of local government revenue through property taxation, as well as to make the tax more progressive."

While revenues from environmental taxation are somewhat above the OECD median, with relatively high taxation of vehicles like in other Nordic countries, the OECD noted that there are inconsistencies in Finland's energy tax mix, and there is scope to raise environmental taxes on certain items.

"As elsewhere, environmental taxation on non-energy items, other than vehicles, is negligible in terms of revenue," the report said.

TAGS: environment | compliance | VAT rates | tax | value added tax (VAT) | property tax | energy | real-estate | environmental tax | food | tax rates | Finland | tax reform | services

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