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.