Income tax deductions in Finland reduce income disparities and strengthen progressivity in the taxation system, according to a new study based on register data from Statistics Finland.
The findings come from a master’s thesis by Reko Heikkilä, summarised in the online journal Tieto&trendit. The research uses the SISU microsimulation model to analyse the effects of earned income tax deductions on the income distribution in 2022.
The study concludes that municipal tax deductions for pension income and basic deductions play the largest role in reducing inequality. These deductions are targeted primarily at low-income households and have a strong redistributive effect.
Heikkilä wrote that the earned income deduction also contributes slightly to redistribution. “The impact on income equality stems largely from municipal tax deductions,” he noted in the article.
In contrast, certain deductions increase income disparities, including deductions for commuting, income-generating expenses, household expenses, and trade union membership fees. These effects are measured using the Gini coefficient, a standard tool for analysing income inequality.
The analysis shows that the absolute value of tax deductions rises with income. However, their share relative to total income declines as income increases. This means deductions are proportionally more important for households in the lower end of the income distribution.
Households in the middle income brackets gain most from earned income and work-related deductions as a percentage of income. Higher-income households benefit more from deductions related to work expenses and commuting.
The top income decile benefits the most from household expense deductions. “High-income households claim household deductions more often because they use qualifying services more frequently,” Heikkilä said.
The study focuses only on deductions related to earned income taxation and excludes deductions linked to capital income.
Heikkilä, who studies economics at the University of Helsinki, completed the work while interning at Statistics Finland in spring 2025. He said personal income taxation plays a notable role in reducing income disparities in Finland. “The largest equalising effect comes from transfer payments, but personal taxation also has a significant impact.”
HT