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Have Tax Increases Impeded Economic Growth in Finland?
On 30 August 2012, the Finnish government agreed on the budget proposal for the year 2013. The expenditures amount to approximately Euro 54 billion, which exceeds the previous regular budget by Euro 1.6 billion. The budgetary deficit is approximately Euro 7 billion, which is estimated to increase the overall amount of state debt to circa Euro 96 billion. The government aims to maintain the highest credit rating available.
In addition to tax increases, the proposal also aims to stimulate growth by introducing some special tax incentives. Investments made in unlisted growth companies will be subject to a deduction. A tax incentive for research and development will also be introduced. Furthermore, the depreciation allowance for industrial production investments will be doubled. Taxand Finland investigates how the new budget proposal will affect investment in the local industry.
According to the budget proposal, tax revenues for the year 2013 will equal approximately Euro 40 billion, which is roughly Euro 2 billion more than the estimated amount for the year 2012, and nearly Euro 4 billion more than in 2011. All in all, tax revenue accounts for 85% of all on-budget revenue. The largest tax receipts are taxes based on turnover, which amount to nearly Euro 18 billion, i.e. over 40% of the overall tax revenue. Among all taxes based on turnover, VAT revenue amounts to almost Euro 17 billion. The second largest revenue sources are taxes based on income, which bring in almost Euro 9 billion, and corporate income taxes which amount to over Euro 3 billion. Different types of excise duties add up to nearly Euro 7 billion, 4 billion of which is contributed to energy tax.
Generally, the proposal tightens progression in earned income taxation as index increments are abandoned for the years 2013 and 2014. The proposal also takes into account the so-called solidarity tax, which refers to temporarily adding an additional tax bracket for annual earnings exceeding Euro 100,000, as well as increasing the taxation of the largest inheritances and estates. Accordingly, the taxation of large pension funds is also increased.
Further to this, all VAT rates are to be increased by 1% from which the total gain in revenue exceeds Euro 800 million. In alignment with increasing the general VAT rates, the insurance premium tax is also increased by 1%. The proposal includes bank tax which amounts to Euro 170 million, and a broadcasting service tax. The latter applies to corporates, companies and individuals and generates nearly Euro 500 million. In addition to tax increases, the proposal also aims to stimulate growth by introducing a tax incentive for research and development and by granting industry the rights to depreciations, which are double the amount of those normally applicable. Investment in growth companies is encouraged by implementing a tax incentive whereby investors are granted the right to deduct part of their investment in their annual taxation, which would be taxed later if the investment is realised. Further, and as an alternative option for investors, the presumed acquisition cost of investments made in unlisted growth companies would be increased to 50% of the realisation value.
The proposal and the government Bills have been presented to Parliament on 19 September 2012. The final budget will be voted on and accepted in December 2012, in the Parliament's plenary session.
The increase of tax revenues in the budget proposal is roughly Euro 2 billion when compared to the estimated amount of revenues in 2012. The tax increases have been criticised for impeding economic growth. The increase in the VAT rates has said to have weakened purchasing power and decreased private consumption.
On the other hand, the budget proposal also includes tax incentives which are aimed at supporting certain business activities. These incentives include a temporary tax incentive for research and development to support growth-oriented product development, and a fixed term doubled depreciation allowance for industrial production investment. Moreover, a temporary investor's tax incentive will be introduced. Investors will get a deduction on investments made in growth companies. This will be relevant for investors who are planning to invest in Finland.
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