Finland is a high tax country because it taxes everybody heavily
Do high taxes make a country great? That was the argument made in a recent New York Times article titled ‘Finland Is a Capitalist Paradise: Can high taxes be good for business? You bet.‘ It told the story of two people who had moved from the United States to Finland and claimed to have found something close to heaven on earth. And it was so, apparently, because of all the taxes there are in Finland. Is this a lesson for the US?
Lets start with some numbers. It is true that Finland’s government takes a larger share of its citizen’s income in tax than is the case in the US. According to the the Organization for Economic Cooperation and Development’s (OECD) rankings of tax revenue as a percentage of gross domestic product, in 2018 Finland’s government took in 42.7% of the country’s GDP compared to just 24.3% – including state and local taxes – in the United States.
But before you start to dream about all the government goodies that could pay for, look at how those revenues are raised.
Personal income tax revenue as a share of GDP comes to 12.3% in Finland and 9.9% in the US (the OECD average is 8.3%). Partly, this is down to higher top marginal tax rates. But it is also, in large part, down to the fact that the Finnish government imposes its top rates on a much broader section of the population that the US does. In Finland, the top marginal personal income and social security tax rate – 58.4% – kicks in when people start earning 1.9 times the average wage ($96,029). In the US, the top rate – 46.0% – doesn’t kick in until you start earning 9.3 times the average wage ($511,047).
Then there are taxes on the consumption of goods and services. These are generally seen to be regressive in that they hit lower-income people proportionately harder than people on higher-incomes. This is because low-income people spend all their income (or more) while those with higher incomes save a substantial portion. In Finland, revenue from these regressive taxes amounts to 14.3% of GDP. IN the US the figure is just 4.3%.
Maybe out couple in the NYT do have it pretty sweet in Finland compared to the US. However, their view might not be widely shared. United Nations figures show that in 2019 the international migrant stock as a percentage of Finland’s total population was 6.9%. It was 15.4% in the US. If we count people are voting with their feet, the US beats Finland.
Even those who do find paradise in the tundra have to pay for it. Finland doesn’t raise more tax revenue than the US by taxing the rich, it does it by taxing everybody as though they’re rich. Even in Finland, there is no such thing as a free lunch.
John Phelan is an economist at the Center of the American Experiment.