Property Taxes Could Prop Up Finnish Tax Base: IMF

by Ulrika Lomas, Tax-News.com, Brussels

30 May 2014

The International Monetary Fund has urged Finland to shift some of the tax burden from direct taxes to property taxes as these tend to have less detrimental effects on economic growth and are more resilient in downturns.

The IMF noted in its report on the 2014 Article IV consultation with Finland that fiscal reforms are needed to revive public finances, which are under pressure from slowing trend growth and a rapidly aging population.

The Finnish government was encouraged to refrain from making further increases to direct taxes, which are already high. The report said that raising the property taxes to the average among member states of the Organisation for Economic Cooperation and Development (OECD) could generate revenue of about one percent of gross domestic product (GDP). It noted that Finland's total property tax revenue represents only 1.1 percent of GDP – less than 60 percent of the OECD average.

Finland's revenue dropped along with an 8.5 percent fall in gross domestic product when the global financial crisis hit in 2009, the report pointed out. Despite sizable tax increases – including a value-added tax (VAT) rate hike from 23 to 24 percent, increases in energy and excise taxes, and higher local income taxes – which raised the revenue-to-GDP ratio from 53 percent in 2007 to nearly 56 percent in 2013, revenues have fallen behind expenditures.

In addition, population aging is expected to contribute to a longer-term fiscal sustainability gap, estimated at around 4.7 percent of GDP, due mainly to higher projected spending on pensions, healthcare, and long-term care, the IMF said.

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