Taxation and Inequality. A Revisionary Study of Changing Income Inequality in Finland, 1961–2005

Saska Heino, University of Helsinki

Following Piketty's Capital in the Twenty-First Century (2014), much attention has been paid on taxation as a driver of inequality. In the Nordic countries, income inequality has risen since the 1990s. It has become commonplace to explain this change by referring to tax reforms in the late 1980s and early 1990s. In Finland, leading authors Marja Riihelä, Risto Sullström and Matti Tuomala (2005) have claimed that the introduction of a dual income tax with a progressive schedule for wages and a relative rate for capital income, has driven up income inequality after 1993, as the rate for capital income was set relatively low in comparison to top wage incomes. This paper criticizes the Riihelä et al. analysis. It is argued on grounds of tax history, progression and redistributiveness that the 1993 tax reform was not a major turning point in Finnish income inequality. In its stead, it is argued that one needs to take the chain of causation further down the road to the profitability of businesses and corporations, which has had a significant impact on top incomes. The paper analyzes a 44-year period during which income inequality first diminished and then, after the early 1990s, rebounded. Primary sources include tax records data as well as data from the National Accounts and corporate equity structures. Methodologically the paper relies on generalized Pareto interpolations (income shares) as well as a panel model on top quantiles' pre- and after-tax income shares vis-à-vis profits, payouts and effective tax rates. Keywords: inequality, top incomes, Finland, taxation, profitability

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 Presented in Session 183. Inequality, Wealth and Poverty