Designing Tax Policy for Finland: Lessons from the Mirrlees Review and Comments on Peter s Presentation

Transcription

1 Designing Tax Policy for Finland: Lessons from the Mirrlees Review and Comments on Peter s Presentation Jukka Pirttilä University of Tampere Labour Institute for Economic Research

2 Contents Wider perspective: connection to labour income taxation and indirect taxation based on the MR Preliminary, since Sir Jim s views are not yet known Comments on Peter s proposals Thoughts regarding the reform in Finland but not necessarily in this order 2

3 Design of optimal labour income taxation (Brewer, Saez, Shephard Chapter) At the lower end of income schedule, the key is to motivate participation participation tax rates for low-paid work should still be reduced at least for parents At the higher end, the elasticity of taxable income (largely reflecting tax avoidance) sets limits to the top marginal tax rate With Pareto distribution and ETI = 0.5, the revenue-maximising top tax rate is 60% The highest effective marginal tax rate (taking into account indirect taxes but not employers social security contributions) is now roughly 61% The movement at the top labour income marginal tax rates should rather be downwards, not upwards 3

4 Indirect taxation (Crawford, Keen and Smith) Recommend a move towards a uniform VAT rate Only exceptions: sin taxes and environmental taxes Also suggest compensating the losses to low-income persons via direct taxation / social security Point out that the employment effects of shifting the tax burden towards taxing consumption rather than income are minor Sensible strategy also here Remove the lowered VAT rates (including raising the VAT on food) Compensate the losses via increases in transfers Few reasons to any large changes in the overall balance between income and commodity taxation 4

5 Some comments on ACE and DIT The recommendation differs from that of Auerbach, Devereux and Simpson and the comment by Gordon. Elaboration of this? ACE would reduce revenues. How should these be recouped? In many places, neutrality is emphasised. Yet, what is real empirical importance of it (debt/eq, clientele effects etc)? Additional comments on DIT 5

6 The balance between labour and capital income taxes (Banks and Diamond Chapter) It is clear that capital income should be taxed It is equally clear that capital income and labour income should not be taxed using the same schedule Currently we do not really know what is the optimal combination Banks and Diamond lean towards recommending a system where labour and capital income taxes are linked, instead of the dual income tax 6

7 Choosing between progressive and proportional capital income taxes Peter lists many advantages associated with the dual income tax Many of these are practical issues On the other hand, recent theoretical work by Diamond and Spinnewijn (2009) and Tenhunen and Tuomala (2009): a positive capital income tax for high-income earners and a subsidy for low-income earners (= progressive capital income tax) is welfare improving One can achieve same redistribution with less distortions But a dual income tax is not necessarily welfare improving Possible efficiency practicality trade off? 7

8 Special emphasis: Income shifting It has become clear that income shifting is a serious problem within the Finnish version of the DIT The split parameter is 9% while it should be more like 3% Dividends up to are not taxed at the shareholder level in closely held corporations. This loophole should be abolished Even dividends exceeding that level are taxed too leniently 8

9 What should the capital income tax rate be? Peter gives a formula: (1-τ)*(1-t)=1-m Currently in Finland τ =26% and m=53% This gives t=36.5% Because of international tax competition, perhaps a sensible reform would be to Cut τ to 25% and m to 50% This would give t=34% Are these rates really low? The average labour income tax rate is roughly 30% Suggests a progressive personal-level capital income tax could better align the tax rates Could be achieved via a linearly progressive capital income tax 9

10 A linearly progressive capital income tax? with a tax-free limit of (say) 1000 Median capital income = 0 and median cap inc for those who are at the highest labour income tax bracket is < 1000 (Income Distribution Survey) would stimulate saving among the majority of the population Exactly where undersaving might be a severe problem And the exceeding amount taxed at roughly 35% Feasible? Since the MTR is constant, could easily be a withholding tax (with a rebate) 10