Real Changes in Personal Income Taxation in Finland (in Finnish with English abstract and summary)

Turkkila Juhani

The study seeks to find out whether the real burden of the personal taxation has increased or decreased. In order to determine this, we investigate how the same real income has been taxed in different years. Whenever the taxes for the same real income for a given year are higher than for the base year, the real tax burden has increased. If they are lower, the real tax burden has decreased.

The study thus seeks to estimate how changes in the tax regulations affect the real tax burden. It should be kept in mind that the progression in the central government income tax schedule ensures that a real change in income will bring about a change in the tax ration. In case of inflation when the tax schedules are kept nominally the same will also increase the real tax burden.

In calculations of the study it is assumed that the real income remains constant, so that we can get an unbiased measure of the effects of governmental actions in real terms. The main factors influencing the amount of income taxes an individual must pay are as follows :

– Gross income (income subject to central and local government taxes).
– Deductions from gross income and taxes calculated according to tax schedules.
– The central government income tax schedule (progressive income taxation).
– The rates for the local taxes and for social security payments (proportional taxation).

In the study we investigate how much a certain group of taxpayers would have paid in taxes according to the actual tax regulations prevailing indifferent years if the income were kept constant in real terms. Other factors affecting tax liability are kept strictly unchanged (as constants). The resulting taxes, expressed in fixed prices, are then compared to the taxes levied in the base year (hypothetical taxation). The question we are addressing is thus how much taxes a certain group of taxpayers with the same socioeconomic characteristics would have paid on the same real income according to the actual tax regulations prevailing in different years. This has been suggested as the main way to measure real changes in taxation, although there are several alternative measures with essentially the same aim.

Next an aggregate indicator of changes in income tax rates is constructed. It is designed to show how much the taxation of income has increased or reduced from one year to next year on average. The main question remains : How aggregation over all income levels should be performed? In order to determine the average real changes in the tax scales the difference functions (difference between actual and hypothetical taxation functions) were aggregated using taxable income as weights. Besides the difference functions, the relative changes in real taxes can be used as indicators of change. In this case the ratio between the taxes computed according to the new and the old situation indicates whether the taxation has become heavier or easier.

The relative changes in tax scales can be described in a way similar to that used in describing the cost of living, or by means of price indices. For example, we can use Laspeyres’ price index formula for computing the ratio between taxes determined by the new tax scales and the old tax scales. The formula answers the question : How much more or less will be paid in taxes according to the new tax scales than according to the old ones when the real income situation corresponds to the old situation.

Information om publikationen

real changes in income taxation, progressive income tax schedule, proportional taxation, income tax deduction system, aggregation, real income tax ratio
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