From a salary increase of 100 euros, 37 euros remain in hand –

Progressio encourages tax planning. Taxation should be neutral in relation to work income, so that everyone participates equally in financing our society, says Erämaja. Vesa Laitinen

A person with a higher university degree does not necessarily have much left over from a salary increase, calculates the chief economist of Suomen Ekonimie Elias Erämaja.

With a salary income of 4,700 euros for a highly educated single parent, a salary increase of 100 euros leaves around 37 euros after taxes and early childhood education fees have been deducted.

– The public debate forgets that the truth about tax evasion is even darker than the tax statistics, because the effects of income-related customer payments and subsidies are not taken into account, says Erämaja in the press release.

If value added tax is also taken into account in the calculation, the net purchasing power of the increase falls below 30 euros.

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For the employer, the price of this salary increase is approximately 120 euros.

The median earnings of wage earners with a higher education degree were around 4,570 euros in 2022, says Statistics Finland. The amount has increased since then.

– Tax progression is exceptionally steep in Finland, which weakens the incentives for wage earners to advance in their careers, says Erämaja.

In his opinion, the tax burden on wage earners is at an unsustainable level in Finland.

– The reform of the tax system could be started by lowering the marginal tax rates on earned income to a maximum of 50 percent in all income categories.

Capital income is a way to escape progression

In 2020, Sweden reduced the taxation of the top five percent of earners. Before this, the Swedish Ministry of Finance had estimated in its presentation that the discount would pay for itself because it would increase the number of working hours.

In Finland, one way to avoid progressive income taxation has been to convert work income into capital income.

According to Erämaja, the use of holding companies in particular is a drawback that weakens the fairness of taxation. The legislation puts wage earners in a different position compared to those who have the opportunity to take advantage of tax planning.

The taxation of dividends from unlisted companies depends on the net assets of the company paying the dividend. The maximum amount that can be withdrawn as a reduced dividend is eight percent of the company’s net assets.

Sanna Marin, for example, took advantage of this relief.

The greater the company’s net assets, the more reduced dividends can be withdrawn from it.

The purpose of the system is to encourage entrepreneurs to accumulate wealth for the company, but with the help of the holding company arrangement, the growth of net worth can be achieved in the blink of an eye.

The issue has come to the fore when the Finnwatch association investigated the tax planning and corporate arrangements of social media stars.

– Taxation should be neutral in relation to work income, so that everyone participates equally in financing our society. For some reason, the decision-makers do not want to address this problem, says Erämaja.

The story was originally published in Talouselämä.