An Economist’s Fact-Based Response to Polarizing Tax Claims

A social democratic think tank recently sought to fuel polarization between low- and high-income earners by claiming that the government’s decision to slightly ease tax progression would only benefit the very highest earners. To support this argument, the think tank used euro-denominated comparisons, which naturally make the differences appear large—especially between the very top earners and the rest of the population.

This narrative was swallowed whole by Finland’s two biggest media outlets—namely the publicly owned Yleisradio and the privately owned Helsingin Sanomat. Both repeated the claims without any critical scrutiny, effectively acting as a loudspeaker for a politically aligned left-wing think tank. Their coverage was soon challenged by Sami Pakarinen, Chief Economist of the Confederation of Finnish Industries, who presented a series of facts on social media.

* * *

According to Pakarinen, “Finland will lower its top marginal tax rate at the beginning of next year from 58% to 52%. This has been recommended for years, as Finland’s top rates are among the very highest in the world.”

He elaborated by noting: “In 2017, the IMF recommended that the top marginal rate should be capped at 44%. The OECD average is around 35%. Even after the reform, Finland remains well above this ceiling.”

Pakarinen also reminded readers that “the top 14% of earners pay 49% of all income taxes. When it comes to net public transfers, the top decile shoulders the lion’s share.” In fact, he emphasized that “Finland redistributes income through taxation more than any other OECD country.”

Furthermore, contrary to the social democratic think tank’s claims, he argued that “the self-financing ratio of the tax cut is very likely above 100%. In other words, by lowering taxes, the state will actually collect more revenue. Recent research points in this direction, and there is finally a growing consensus among economists.”

* * *

For international readers, it is worth noting that research shows the majority of journalism students in Finland lean toward the green-left. Perhaps this helps to explain why Finland’s otherwise exceptionally free press—at least in international comparison—can nevertheless appear remarkably one-sided. In practice, it often leans toward planned-economy thinking and value liberalism, as this very case illustrates.

As a result of all this, one is entitled to ask: what exactly are Yleisradio and Helsingin Sanomat aiming at by repeating the left’s polarizing and misleading claims as if they were facts? A society divided along American lines—or even outright revolution?

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Finland to Cut Off Taxpayer Money for Immigration

Under the leadership of Finland’s Minister of Finance, Riikka Purra (Finns Party), a budget proposal has been drawn up which would allocate no state-collected tax money next year to the integration of immigrants or the reception of quota refugees. This would be a major change from the current situation, in which a significant share of tax revenue is used precisely for these purposes.

According to Minister Purra, “The integration structures within the public sector, and the ‘private’ integration industry that has grown around them, form one branch of the welfare state that has become enormous. The taxpayer foots the bill. If immigration broadly worked, such structures wouldn’t be needed at all. The government has previously cut integration spending, and in my opinion, it could easily cut more.”

Minister of the Interior Mari Rantanen (Finns Party) commented on the proposed change, stating that “Integration should not be measured by the amount of money spent, and society should have an incentive to push those granted permission straight into work. That would also put an end to all sorts of busywork back home, such as collecting droppings in matchboxes.”

It remains to be seen, however, how the other government parties and Parliament will respond to the Finance Minister’s proposal. It is expected that the ending of support for companies making their living from immigration would face opposition within the government, at least from the Swedish People’s Party, and in Parliament from the entire green-left bloc.

The taxpayer, on the other hand, would welcome it—since once Finland’s chronically deficit-ridden state budget is brought into balance, they might one day have a say over the use of a larger share of their own paycheck.

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Elections in Venezuela Do Not Offer Reason for Optimism

Although Western countries have long been more or less functioning democracies, this is not the case everywhere. The world’s first socialist state, the Soviet Union, did collapse under its own impossibility back in 1991, but that doesn’t mean socialism lacks support in today’s world.

An example of this unfortunate fact was seen over the weekend in Venezuela, where the socialist party received as much as 83 percent of the vote in Sunday’s parliamentary — or National Assembly — elections. In addition, a group close to the socialists gained another six percent.

The Venezuelan opposition gathered only 5.17 percent of the votes. This was influenced by the fact that many opposition leaders had urged their supporters to boycott the elections, claiming that President Nicolás Maduro had fraudulently won last year’s presidential election. This view is also shared by the international community.

It remains to be seen what Venezuela’s socialists will do with their electoral victory. However, their use of power so far does not offer much reason for optimism.

According to Wikipedia: "During the 21st century, under the leadership of socialist populist Hugo Chávez and his successor Nicolás Maduro, the Venezuelan economy has collapsed, prompting millions of citizens to flee Venezuela. GDP has fallen by 80 percent in less than a decade. The economy is characterized by corruption, food shortages, unemployment, mismanagement of the oil sector, and since 2014, hyperinflation. As of 2024, inflation has stabilized at 59.61%."

This can be compared to the time before the socialists came to power. Back then, Venezuela's economy was growing strongly, and for example, GDP per capita rose by as much as 400 percent between 2003 and 2010 — in just seven years. A similar development can hardly be expected based on the election results we’ve just seen.

Of course, Venezuela is just one of many countries that still believe in socialism, but in practice, it is a fairly representative example of its kind. And that is why it’s worth wondering why socialism still enjoys so much support around the world — not only in developing countries but also in prosperous Western nations like Finland.

Admittedly, here the socialists don’t want to call their economic thinking socialism. Instead, they "only" aim to raise taxes and transfer as many of society’s functions as possible under the responsibility of the public sector — in other words, to implement socialism without naming it for what it is.

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The Real Problem with American Cars: Poor Market Fit

The President of the United States, Donald Trump, says he plans to impose import tariffs on the European Union quite soon. The reason for this is the weak demand for American products on the old continent.

This also affects Finland, as e.g. Tesla is the only American car brand with a significant market share here. Moreover, many of its models are manufactured either in Germany or China.

When it comes to cars, the problem with sales in Finland is not anything other than the weakness of American offerings. American cars are simply too large to fit comfortably into local parking spaces, and they consume far too much fuel.

The latter issue is largely due to the high fuel taxes in EU countries. While a gallon of regular gasoline costs just over three dollars in the U.S., the same amount costs around seven dollars (6.8 euros) in Finland. Additionally, the income level of Finns is about one-third lower than in the U.S., while taxation is significantly higher.

Therefore, the export problems of the U.S. automobile industry will not be solved by imposing tariffs on EU countries but rather by designing cars that are suitable for Finland and Europe in general. However, it remains to be seen whether American companies - and the USA under Trump's leadership - have the necessary willingness to do so.

Previous thoughts on the same topic:
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Bad News for Vladimir Putin and His Imperialistic Dreams

The Russians have recently received multiple pieces of bad news. The latest, which surfaced through social media, reports that in September, Russia experienced the highest average wartime losses: 1,271 soldiers killed or wounded daily.

Additionally, also according to information from social media, the Russian army has lost the equivalent of five divisions' worth of armored equipment in the Pokrovsk area of Eastern Ukraine over the past year. This information was gathered by compiling all recorded instances of Russian equipment destruction for which there is video evidence: a total of 539 tanks and around 1,020 armored vehicles.

If losses continue at this pace, it is possible that the Russians will eventually have to abandon their gradually successful offensives in the Pokrovsk area and retreat to defensive positions.

* * *

Another drawback for Putin comes from the Russian economy. Namely, Russia's state budget for next year includes a 12% increase, mainly due to a quarter rise in military spending from this year.

Military expenditures will amount to 6.3% of the country’s GDP. Additionally, it is likely that more military expenses have been concealed, related to the ongoing invasion of Ukraine.

However, Russia’s economy has not developed, as the government has simply shifted more costs onto citizens and businesses. For example, the corporate tax rate is rising from 20% to 25%, and personal taxes will become progressive. In addition, the costs of housing, services, and public transport will also be increased.

As a result, inflation is expected to accelerate to at least 5.5%. Therefore, Russia’s central bank was shocked by the budget and plans to raise the key interest rate from the current 18% to 20%, but even this is considered insufficient to keep inflation in check.

Thus, next year’s Russian budget brings three pieces of bad news: the budget growth comes solely from businesses and citizens’ pockets, despite structural balance, the budget will increase inflation, and there is no end in sight to the negative trends as the invasion continues.

However, it remains to be seen how all of this will ultimately affect Putin's army's ability to wage war in Ukraine. The possible loss of its fighting ability would be really bad news for Vladimir Putin and his imperialistic dreams.

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The Finnish Government is Unanimous on Fixing the Country's Economy

The Finnish economy is in poor condition for many reasons. However, the situation is about to change, as the government formed by the political right has decided to address the issue.

This is despite the fact that the opposition, led by the left, has done everything in its power to sow discord among the government parties. One party has been accused of racism, and another of favoring the wealthy. And so on.

Nevertheless, the relations between the governing parties seem to be working, as evidenced by the fact that a budget meeting planned for two days only took one day. And there is no doubt that the outcome will have economic impacts on the lives of ordinary Finns.

The government's decisions were varied. First of all, changes were made to taxation so that low- and middle-income people will have more of their salary left for personal use than before. On the other hand, spending was directed toward essential expenses, and therefore, significant cuts were made to less essential items, such as development aid.

Despite these decisions, Finland's economy will not turn around overnight. However, over time, especially the structurally important budget changes, such as better support for business innovation, will take effect and lift Finland's economy out of its current decline.

It is also certain that the political green-left will not stop offering socialist solutions. And if they come to power in the 2027 elections and undo the continuity of the decisions now made, Finland will face an even more challenging future than the present.

That is why it is important for voters to understand this and refrain from disrupting the positive progress that is currently underway. Personally, I believe in that.

Previous thoughts on the same topic:
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Balancing the Books

In recent years, there has been much discussion about the indebtedness of nations. This includes Finland, whose debt-to-GDP ratio is at a middle level compared to other Western countries, although it is rapidly increasing.

This debt accumulation can be attributed to a variety of reasons, but it is often due to the inability of politicians in government to make difficult decisions. In other words, choices that may be unpopular with citizens and whose alternative is to arrange matters by taking on debt, the repayment of which will be handled by future governments and, in the worst case, even by generations yet to be born.

In this regard, Finland is an interesting case, as the country's economic growth has been negligible since 2008, while government expenditures have rapidly increased under several administrations. Consequently, public debt in relation to GDP has risen from 28% to 55% in just fifteen years.

As a result of this development, the public sector is forced to allocate increasingly large sums of money to debt servicing rather than providing services to citizens. Finnish Finance Minister Riikka Purra (Finns Party) highlighted this issue with a few examples.

According to her, Finland’s interest expenses on state debt will be 3.5 billion euros next year. This amount is about 1.6 times the total expenditures of the Ministry of the Interior's administration of internal security. It is also larger than the state subsidies for basic services provided by all municipalities to their residents or half of the operational budget allocated annually to the Finnish Defense Forces.

It is hoped that these examples will awaken the political left in Finland—and in other countries as well—to the understanding that lax economic policies have negative consequences. And for the people who elect their leaders to realize that there are no free lunches, and that expanding public services beyond revenues will only lead to bigger problems.

It seems that the current conservative government in Finland has at least a reasonable understanding of this, based on the Finance Minister's statement. However, it is hoped that this understanding will continue with future governments as well, so that Finland’s economy can be put back on a sustainable footing, ensuring that public services can be maintained in the future.

Aiempia ajatuksia samasta aihepiiristä:
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Russian Tax Overhaul: Citizens to Bear the Burden of War Losses

A recent news report indicated that Russia's war in Ukraine will increasingly impact the wallets of its citizens. This is because President Vladimir Putin has been forced to overhaul taxes to finance his country's army, which has suffered significant material losses.

In total, Russian citizens will have to pay an additional 27 million euros in new taxes. This burden will be distributed according to people's wealth, with the wealthiest bearing a greater relative share. In other words, the previous flat tax system will change to a progressive one.

It remains to be seen how Russians will react to the reform. It would, of course, be desirable for them to reject it and launch widespread rebellion against the pointless war in Ukraine and the man who started it, Vladimir Putin.

This possibility is supported by the fact that tax increases have often sparked popular uprisings. For example, this was the case in Finland at the end of the 16th century and this year in Kenya, where the government has been increasingly pressured.

On the other hand, Putin's administration has taken a page from Stalin's book and keeps the country's citizens in fear and strict obedience. Therefore, any possible dissatisfaction among the people might remain at the level of grumbling—just as the lamentation of the families of the over half a million Russian casualties in Ukraine has.

Nevertheless, Ukrainians should not lose hope. There is always a limit to what people will endure from their leaders. Thus, it is possible that the newly decided tax increases are the straw that breaks the camel's back.

Previous thoughts on the same topic:
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South Africa: life without a culture of maintenance

South Africa is an interesting anthropological and cultural subject of study. The country's economy was in excellent shape when the white minority rule transitioned to black majority governance.

For this reason, I have occasionally written (in Finnish) about the events in the country. And today, I will do so based on an Al Jazeera article about the situation in the country.

According to the "Pravda" of the Arab world, South Africa has had uninterrupted electricity distribution for 57 consecutive days, which is the longest continuous period in over two years. This is significant because, last year, power outages caused losses of up to 51 million dollars per day due to the closure of factories, offices, and shops, according to the country's central bank.

However, electricity problems are not the only challenge in this country of 62 million people. Decades of neglect in infrastructure maintenance and investment have also led to the deterioration of transportation networks and water supply. This may result in the African National Congress (ANC), which has been in power since 1994 – the end of apartheid – losing its parliamentary majority in next week's elections, according to opinion polls.

South Africa has a large public electricity producer, Eskom, which mainly operates outdated and poorly maintained coal power plants. These plants have also suffered from coal and copper thefts as well as corruption. As a result, President Cyril Ramaphosa had to declare a state of emergency last February, with power outages stretching up to 12 hours a day.

Since then, private investments in wind and nuclear power have emerged in South Africa, resulting in the private sector now producing about a third of South Africa's electricity. This partly explains the recent reduction in power outages.

Power outages have also prevented water treatment plants from using their pumps, leaving people without potable water. Additionally, according to Johannesburg's water utility, nearly half of all pipeline water is lost to leaks. This means 70 million liters of drinking water are wasted every day. The reason is the high age of municipal distribution systems: in Johannesburg, for example, they were designed between the World Wars.

Water utilities are also vulnerable to vandalism. Thieves take everything from metal parts to pumps and sell them onwards. And there is no such maintenance culture for infrastructure in South Africa as in Western countries. Even if there were, water utilities struggle to generate revenue because people cannot afford to pay.

South Africa's water situation might be helped by transitioning to a private water distribution system, similar to electricity. The same applies to South Africa's state-supported railway company, which has also been plagued by poor management and corruption allegations.

Last year, the dilapidated railways caused economic losses equivalent to up to 6 percent of the gross domestic product in 2023, according to the country's Ministry of Finance. And that's not all, as the public railway company recently warned that it cannot service its debt of 130 billion rand (7.2 billion dollars) without direct state aid. Therefore, President Ramaphosa has also hinted at the possibility of privatizing the rail transport sector.

* * *

Next week, South Africa will hold elections in a situation where the infrastructure is failing, and in addition, a third of the entire population and nearly half of all young people are unemployed, 56 percent of the entire population lives in poverty, and economic growth is non-existent (with a forecast of 0.9 percent growth for this year). At the same time, crime rates and corruption scandals are daily occurrences.

Last year, the country's debt-to-GDP ratio grew to 74 percent (in Finland, it's 75.8 percent!), and the current government has to use more than a fifth of its tax revenues to pay interest on the debt. This diverts money from other sectors – such as education, healthcare, and infrastructure.

Therefore, unemployment in the country needs to be reduced to increase revenues. Consequently, the next government – regardless of its composition – should focus on stimulating the economy and creating jobs. This could be achieved by offering incentives for private infrastructure investments, which would positively reflect on the country's export industry and other businesses.

It remains to be seen whether South Africa can rise from the decline it has been on for the last decade and a half under the ANC-led centralized economy. Or will its fate be to sink into a typical backwater of black Africa, where nothing works except corruption and crime?

Previous thoughts on the same topic: Should forbidden questions be answered or not? Corruption in Nigeria may affect Europe They want to wipe out from Finland what is good for Africa

Finns are backing the government making difficult decisions

The problem commonly associated with democracies is that when the government has to make unpleasant decisions for public finances, voters tend to shift their support to the opposing parties. Thus, there is a temptation for leaders not to make economically sound decisions while in power.

In this sense, the situation in Finland is interesting. The right-wing government that came to power last summer has planned labor market reforms, cuts to public services, and reductions in income taxes to balance the state budget, which was heavily indebted during the previous government's term, and to revitalize economy.

These plans have resulted in widespread and ongoing political strikes opposing the reforms. Both trade unions and green-leftist parties are behind these strikes, and even according to citizen surveys, the protests have public support.

However, what makes the situation interesting is that in polls measuring party support, the government's popularity has not declined; instead, it is clearly on the rise. Based on this, it seems that Finns understand that their country's public finances are indeed in need of correction. Therefore, rather than abandoning the parties in power, they are actually shifting towards supporting them.

This bodes well for Finland's future, but of course, only if the ongoing changes by the government lead to results and the public remains supportive for long enough for the economy to turn back towards growth.

Previous thoughts on the same topic:
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The change in the demographic structure of Helsinki

The Capitol of Finland - Helsinki - is not a huge city but rather a relatively big town with its ca. 660 000 inhabitants. It means that approximately 12 percent of Finns live in their Capitol.

According to current predictions, the population of Helsinki will grow up to 700 000 people in the following six years. But that will not be due to a baby-boom or even Finns moving from countryside, but mostly via immigration from abroad, which will be responsible of two thirds of the increasing population.

Even today, Helsinki may be considered somewhat multicultural town as only about 83 percent of people speak Finnish or Swedish (the official languages of the country) as their first language. Russian is the most common foreign language and is spoken by almost three percent of the population. That is followed by Somali, Estonian, Arabic, and English speakers with 1.8, 1.6, 1,3 and 1,1 percent share of the population. 

The figures above indicate, that most speakers of foreign languages have moved to Helsinki to work in Finland (e.g. Russian, Estonian and English speakers). In other words, they are contributing to the welfare of the city dwellers and whole country. 

However, in 2021 the number of people speaking domestic languages moving out from Helsinki was higher than the amount of those moving in. The reasons are unclear but may have to do with increasing possibilities of remote working, COVID-19 pandemic or increased violence in the streets of Helsinki. 

The big question in the future will be, what kind of immigrants Helsinki will attract in future. Will people move into the city due to its working possibilities or are they only looking for the benefits of the relatively liberal social welfare-system of Finland. And - as has been seen during the last few years - will they instead of working contribute to the criminal records. And thus reduce the quality of life in the town?

 

The answer cannot be provided yet, but it is clear that the immigration policy of the next Government of Finland will direct the development. The key question to be decided by voters in spring 2023 is, whether Finland will support possibilities for private enterprises to hire highly educated foreign workforce or if it rather opens Finland´s borders to masses of uneducated asylum seekers from the developing world. 

Interesting though, according to recent news, almost one third of Ukrainians - who escaped Russian aggression - have plans to live rest of their lives in Finland. They are hard working, and have not caused similar problems as people from Iraq, Somalia and Afghanistan who looked for protection in 2015 using the war in Syria as an excuse. 

Whatever will be the outcome on the politics of the next Government in 2023-2027, its will have a major impact on the future of the Capitol area of the country. In the best case, Helsinki may in future - largely due to the positive contribution of immigrants - be seen as an excellent option for people looking for sufficient income and decent living in a safe environment - but in the worst case the Capitol may develop towards a town with poor street safety but high taxes to support living of increasing non-working population. 

These two scenarios will provide the road make to the future of Helsinki - and ultimately the whole of Finland. Therefore, elections of the Finnish Parliament in 2023 are more important than normally. And voters should use their right to give their support to candidates only after a serious consideration.

Previous thoughts on the same topic:
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Share of EU recovery funds will turn attitudes more negative

Finland´s share from the EU recovery (from COVID-19) funds is reduced by 300 million euros. Therefore, our share of funding is 4,2 billion euros less than our payment on the package. 

The reason for our reduced share is the economic recovery of Finland that being more positive than predicted. The basis for this conclusion is the development of the national GDP, which in 2021 increased by 3.5 percent from year 2020. 

Therefore one - e.g. the Prime Minister of our country - might think that the reduction in Finnish share is a fair decision. Unfortunately I must point out three facts. 

First, the economic growth of Finland was made by increasing its indebtedness considerably - by decisions made by a government led by the above mentioned prime minister. Second, the economic growth of Finland is predicted to slow down during the ongoing year. Third, the future of the Finnish forest industry - responsible of ca. 20 percent of the export value - has been challenged by the commission despite its high sustainability compared to other EU countries.

It should also be noted that the taxation burden on Finnish taxpayers is among the highest in EU, and increasing quickly. Therefore I would not be amazed if the attitudes among ordinary people in Finland would turn more negative towards EU in the becoming years. 

Previous thoughts on the same topic:
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A Finnish Professor would raise inheritance tax up to 65 percent

Professor Heikki Hiilamo of the Helsinki University proposed that inheritance tax should be raised up to 65 percent. He justified that by the inequality of people, which reduces the chances of poor people to succeed in the society. He also noted that it takes a lot of education to allow them a chance to prosper, which is expensive and not possible in a highly unequal society. 

I just wonder how would such a high taxation of inheritance affect the motivation of elder people to work - and pay taxes - when their offspring would inherit only a third of their fortune and property? And how would that affect the accumulation of funds for investments in private companies owned by single families? 

And ultimately, how would such a high taxation finally affect the living standard of poor people in a free world, where rich ones always have a chance to find a new home in a country, where the taxation is reasonable and hard working is encouraged by a possibility of transferring its outcome to offspring?

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