The Finnish taxation system differentiates between two types of taxable income, i.e. earned income and capital (unearned) income. Earned income is subject to a system of progressive taxation, whereas tax on capital income is payable at a flat rate and is subject to proportional taxation. From the 1^st January 2000 the tax levied on capital income will be 29 percent.

Earned income, which includes for example wages and salaries, benefits and pensions, is subject to taxation on both a national and a municipal level. National income tax is progressive. In addition to income tax, individuals in employment are liable for social security payments which consist of occupational pension contributions and both unemployment and health insurance contributions. An employee on an average salary will pay approximately 35 percent in tax on their income. Contrary to the practice in most other EU countries, employees in Finland, whether with or without dependants, are liable to pay the same amount in tax on the same income. Family allowances are provided as direct transfers, for example in the form of child benefits, not as adjustments to tax. Spouses are taxed on their individual income and not as a couple.

Interest received, dividends, rental income and capital gains are examples of capital income. The taxation rate of capital income has been increased during the last years from only 25 per cent in 1993-94. In spite of that the taxation rate of capital income (29 %) is markedly lower than is the rate of taxation for the higher tax brackets of progressive income tax. This causes problems as various methods can be employed, in an attempt to convert earned income into capital income, in order to avoid the higher tax liability.

SAK goals on taxation

SAK argues for structural changes to the taxation system. SAK is in favour of reducing tax on labour and of the introduction instead of additional taxes on capital income, wealth, property and for the environment. The tax liability on dividends received is particularly low in Finland, due to the fact that the tax paid by the relevant company is fully reimbursed to the recipients of the dividends (avoir fiscal). Taxation on property is also low, when compared with international standards.

In order to encourage employment, reductions to the income tax burden should be first and foremost focused on those in the low and middle income brackets. This could be implemented by raising the personal allowance in respect of municipal taxation. The personal allowance can only be applied to earned income. Work-related costs should be allowed as tax deductible items to a greater degree, than at present. An example of the current practice is that commuting costs are currently tax deductible only after an excess of 3000 Finnish marks, or approximately 500 euros.

The EU will commence, on 1^st January 2000, a VAT trial in the labour intensive service industries. During this trial the member states may temporarily apply a lower rate of VAT, in certain service industries, than the current national VAT rate. SAK is of the opinion that restaurant services should have been included in this trial. Finnish restaurant services are subject to the standard VAT rate of 22 percent. Restaurant services should be added to the list of reduced Value Added Tax rates as contained in the EU Directive on Value Added Tax.

Interdependent pay and tax solutions

Moderate pay rises and reductions in tax were combined in the last two incomes policy solutions. In this way an improvement, in both the employment rate and in the purchasing power of those in employment, could be successfully secured at the same time.

According to the manifesto of the current Government, reductions in the taxation of labour will be continued. However, a continuation of strong economic growth, moderate income policy solutions and further modernisation of the taxation structure are the prerequisites for reductions in tax. The Government has postponed making its key decisions on taxation until the results of the current collective bargaining rounds are known. The Government may be able to support moderate pay rises in conjunction with favourable tax solutions.