Finns are already mainly paying flat tax: Facts for discussion on flat tax

The flat tax model differs from progressive taxation so that all income is taxed at a fixed tax rate regardless of the amount of income. This principle is currently applied to the majority of the income received by natural persons in Finland. A fixed tax rate is used in municipal taxation, social security contributions collected from earned income, and all capital income. Companies pay taxes according to a single tax rate.

”The only progressive income tax is the tax paid to the state for earned income which only accounts for about a quarter of all taxes paid by Finns on the basis of income”, reminds Hannele Ranta-Lassila, Director at the Central Chamber of Commerce of Finland.

Flat tax would encourage the middle income group
In all countries that use flat tax, small income has been completely exempted from tax with a basic allowance. According to a study commissioned by the Central Chamber of Commerce of Finland and conducted by the Government Institute for Economic Research, the general tax should be 32.5 per cent for the tax revenue to stay at current levels in case there was a 5,000 euro basic allowance. If the basic allowance was 7,500 euro, the flat tax rate should be raised to 36.7 per cent, and a basic allowance of 10,000 euro would lead to 41.5 per cent tax rate.

“The effects of income distribution are determined according to the amount of basic allowance. A high basic allowance favours those with low income and a low allowance those with high income. In different alternatives the effect of tax rate on the middle income group would be low, but a significant change would be the decrease in marginal taxation, which would have a clear encouraging effect”, Ms Ranta-Lassila emphasises.

Flat tax would affect the distribution of income between the state and municipalities
The municipal self-administration includes the right to tax the residents of the municipality and determine independently the tax rate applied in the municipality. Perhaps the biggest problem of the flat tax model is securing the right of municipal self-administration in a system where a single tax rate is applied in the whole country. Solving the problem would require creativity and new kind of thinking in the distribution of income between the state and municipalities.

Flat tax model in international comparison
Income is taxed according to a flat tax model in around 20 countries. All the systems differ from each other to some degree. The only common feature is that all income is taxed at a fixed tax rate regardless of their amount.

The countries that have adopted a flat tax model are usually former socialist states, and small or medium-sized at most. The only large national economy that uses the flat tax system is Russia. The only country with a non-socialist background is Iceland. A typical feature of flat tax countries is a relatively small public sector the financing of which does not require much tax income. In these countries it has been possible to start the income tax system with a clean slate. That has helped the adoption of the flat tax model.

Background information about the flat tax study
Finns have very superficial knowledge about flat tax. Comments for and against the model have been formed more on the basis of emotions than knowledge. Flat tax has been, for example, claimed to favour people with high income. The model does not in itself automatically mean that taxation will become lighter for some and tighter for others. The details of the flat tax can be constructed in such a way that the effects of income distribution agreed on together within the political system can be reached. The Central Chamber of Commerce of Finland has drawn up a report on what flat tax is and what it is not. The report is not a comment for or against flat tax. The purpose is to provide a factual basis for the discussion on the issue.

Further information: Pauli K Mattila, Deputy Director General, the Central Chamber of Commerce of Finland, tel. +358 500 435 702