Sweden Finland Austria

4.2.
Changes in the Finnish tax/benefit system. 1994-1997
Introduction
In the time span covered, 1994-1997, there were few very substantial and 'visible' changes
in the Finnish tax/benefit scheme, but there was a gradual development towards somewhat
lower benefits (at least relative to the APW income level) and a change in the composition
of the social contributions based upon wages and total income (including most transfer
payments) in the tax scheme. A quite considerable reduction in personal taxation was,
however, implemented in 1997.
Compared to the changes in the Swedish tax/benefit system the Finnish changes seem to
be more gradual and less 'visible'. Reducing the base for calculation of U.B. instead of the
compensation percentage might be one example.
Personal taxation
Compared to 1994 the max. deduction for work related expenses was reduced in 1995. The
social contributions based upon wages (for unemployment benefits and public occupa-
tional pensions) were increased in 1995, while those based upon 'all' income, including
benefits (these contributions are for illness and national pensions) were lowered. This
'twist' will be of some importance for the impact on disposable income of some of the 'events',
cf. the following sections.
In 1996 the mentioned 'twist' concerning social contributions continued, those based upon
'all' income, including most benefits, were lowered again.
Considerable changes were implemented in 1997. The tax rates in the state tax schedule
were lowered by 1 percentage point and the thresholds between the tax brackets increased
significantly. The social contributions based upon wage increased slightly. The average
local government tax rate was a little lower in 1997 than in 1996. More importantly, the
low income deduction in local taxable income was changed substantially, the build up is
faster, the maximum is 5,500 FIM (against 2,000 FIM in 1996) and the tapering is more
gradual, implying that the deduction is effective over a much wider span of income than
before. Finally, the 
twist' was continued also by reduction of the contribution for illness
insurance based upon 
all' income.
The results of the changes and of the progression in the Finnish tax scheme is contained in
table 4.3.

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101
Table 4.3.
Average tax for single APW, 1994-1997. Income at APW level.
1994
1995
1996
1997
1)
Gross wage, FIM
121,916
132,533
137,046
141,157
Tax + soc. contribution, FIM
45,338
50,419
51,495
50,708
Average tax, %
37.2
38.0
37.6
35.9
Tax rate, local government, %
18.83
18.83
18.81
18.73
1) Preliminary calculation (
Elements').
The increase in the tax burden from 1994 to 1995 is primarily because of the progression
in the state tax schedule, the nominal income increase from 1994 to 1995 is quite high,
close to 9 per cent. The slight fall in the average tax burden in 1996 is primarily because
of the continued 'twist' already mentioned. The overall effect of this was a lowering of the
rates for social contributions compared to 1995. The changes in 1997 result in a significant
reduction in the average tax burden.