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Tax trends increase inequality - to what end?

by Jorma Penttinen (12/06/07)

In taxation, there have been some continuous trends the consequences of which are hard to swallow. There are of course those abominable tax havens and the financial industry around them that weaken the basis of any society but practically no-one right-minded denies the harmful effect they have.

Tax havens are enemies of state and regular tax-payers, and even enemies of market economy. The secrecy, illegality (and immorality) are not compatible with the theory of well-working markets.

The other major, and more recent, phenomenon in taxation is the fierce tax competition and the many forms it takes also here in the Nordic countries. Sweden’s new government decided to abolish the wealth tax in the vague hope that persons like Ingvar Kamprad (IKEA, corporate income channelled to an extremely shady Dutch foundation) or Hans Rausing (head of the family that owns Tetrapak; he is one of the richest men in Britain who in some years received more money from the British state than he paid taxes) will find their way back home.

Finland did erase wealth tax a bit earlier but (un)fortunately there are no billionaires we can seduce back with this kind of tax breaks.

The question, nevertheless, is that where will it all end? Will taxes be abolished from all companies and also from individuals that are part of the ever more important class of “experts”? And will more and more taxes then be paid through VAT, environmental taxes, and all kinds of user fees, which mean that the poor and lower middle class will in future pay a larger proportion of all taxes?

Finland, for example, was until mid 1960s a country with large income and wealth inequalities. The poorest fifth of the population received only three percents of all incomes, and the richest fifth nearly half (48,5%). In the following 30 years income differences narrowed markedly, but then they began to rise since 1980’s.

The major change happened in the early 1990’s when the corporate income tax was eventually reduced to 28%. As the following diagram shows, it had enormous effect especially for the very rich who more than doubled their incomes in a decade.

The growth of net real income in Finland in different income deciles, and in the upper 1% from 1990 to 2002.
Average growth 19.29%. From

This trend continues even stronger even if people are more and more alarmed of the rising inequality. Finland’s next government, for example, will ease inheritance taxes.

The funny thing is that decisions to scrap taxes from the wealthier part of population are justified by saying that this will help the poor. Following this logic through, one can say that the class society we had hundred years ago was better for the poor.