Taxation

Updated: 15 Mar 2021
Next update: 15 Mar 2022

Tax ratio describes the amount of compulsory taxes and other levies collected by general government during the year, expressed as a percentage of GDP for that year.

Total tax ratio is one of the commonest measures used in international comparisons of public sector sizes.

The development of general government finances and the balance between expenditure and revenue directly influence the level and need for taxation. A characteristic feature of the welfare state has been the wide range of public sector tasks and large public social expenditure, which has been reflected in Finland’s high taxation rate and taxation directed at many different sectors. A prerequisite for economic development and the balance of public finances, moreover, is to ensure sufficient employment to enable a sufficient level of tax revenue and thereby cover the funding of public income transfers.

The targeting of taxation also has significant spill-over effects on the operating conditions and competitiveness of the business sector and industry. The economic effects of the national tax system are particularly highlighted in today’s global market. In terms of the vitality of industry, the tax system must be sufficiently clear and predictable. The level of taxation should also be reasonable to ensure that practising business activity in Finland is profitable and competitive relative to international competitors.

Taxation is also reflected in the development of households’ purchasing power, and therefore in growth prospects for demand and trade. Tax policy can steer citizens’ consumption in a desired direction by taxing in a targeted way certain commodities with excise duties, for example. Moreover, the government can at the same time use tax solutions to encourage entrepreneurs to invest and to activate consumer demand when the economy is weak.

   

Tax revenue decreased by 2.2 per cent in 2020

The accrual of taxes and compulsory social security contributions decreased by 2.2 per cent in 2020 mainly due to reasons related to the corona pandemic. The total accrual amounted to EUR 99.2 billion. The tax ratio fell from the previous year by 0.4 percentage points to 41.8 per cent. The tax ratio describes the ratio of taxes and compulsory social security contributions to gross domestic product. These data are based on the preliminary data on national accounts for 2020.

In addition to the tax rate, we can examine the net tax ratio, which is calculated by deducting income transfers paid by general government from taxes received by general government. In 2020, the net tax ratio was 15.4 per cent of gross domestic product, down by 2.8 percentage points from the previous year. The corona situation contributed to the decrease in the net tax ratio, especially due to the growth in income transfers, but also to the decrease in the accruals of taxes and social security contributions.

The value added tax revenue decreased by 0.9 per cent from the previous year and was EUR 21.8 billion. In the accrual basis of the national accounts, value added tax revenue also includes the 2020 taxes deferred to be paid during the next 1.4 years by means of payment arrangements made due to the corona situation. The revenue from other taxes paid on goods and services decreased by 4.0 per cent, the most significant in euros were the revenue from central government's share of Oy Veikkaus Ab's profit, which decreased by 32.1 per cent and amounted to EUR 746 million, and motor vehicle and motorcycle tax, whose revenue decreased by 19.5 per cent and was EUR 713 million. Similarly to revenue from central government's share of Oy Veikkaus Ab's profit, the revenue from lottery tax fell considerably (by 23.1 per cent) and its revenue was only EUR 170 million. The revenue from energy taxes decreased by 1.0 per cent and the revenue for the year was EUR 4.3 billion. The revenues grew mainly concerning tax on soft drinks (16.1 per cent), pharmacy fee (5.3 per cent), insurance premium tax (3.9 per cent), tobacco tax (3.4 per cent), alcohol tax (2.6 per cent) and vehicle tax (1.6 per cent). Of these, the biggest revenues in euros were EUR 1.5 billion in alcohol tax, EUR 1.2 billion in vehicle tax and EUR 1.1 billion in tobacco tax.

The revenue from income tax paid by households grew by 1.6 per cent from the previous year and amounted to EUR 29.8 billion. A significant contributor to the decrease in tax revenue was corporations' income tax, the revenue from which (EUR 4.8 billion) decreased by 20.3 per cent from the year before. The revenue from taxes on property grew by 2.8 per cent. In 2020, the revenue from inheritance and gift tax was EUR 797 million or 6.4 per cent higher than in 2019. The revenue from asset transfer tax was EUR 822 million and it decreased by 4.1 per cent from one year before.