A snap purse with coins and banknotes on a newspaper. Establishing a separate, flat tax rate for capital income has widened income inequalities in Finland, reveals a study conducted by VATT Institute for Economic Research. (Jussi Nukari – Lehtikuva)


INCOME DISPARITY in Finland rose to a new, permanently higher level in the wake of the recession of the early 1990s, according to a study published in late November by VATT Institute for Economic Research.

The study reveals that the highest-income percentile doubled its share of income between early 1990s and early 2000s – from 2.8 per cent in 1990 to 6.1 per cent in 2004. The share dropped to five per cent by 2019.

Also the Gini coefficient indicates that income disparity has increased, with the coefficient rising from 0.2 in 1990 to 0.26 in 2003. The reading has hardly changed in the 2000s.

Researchers at VATT estimated that the increase in income disparity is attributable particularly to an increase and concentration of capital income to high-income earners, highlighting that wages and earned income have developed very stably. High-income earners benefited from a tax reform implemented in 1993, which established a lower flat tax rate for capital income.

Capital income not exceeding 30,000 euros is taxed at a rate of 30 per cent and capital income exceeding 30,000 euros at a rate of 34 per cent.

Even though the total tax rate of individuals decreased across income brackets between the mid-1990s and 2010s, the decrease has been the sharpest for high-income earners.

Also the social security cuts and freezes carried out in the aftermath of the recession have increased income inequality in Finland. Income differences between employed and unemployed households grew at the end of the 1990s, when the long-term unemployed were transferred from earnings-based unemployment allowance to the labour market subsidy and social security benefits were cut or frozen.

While the median real income of employed households grew by 37 per cent in 1990–2010, that of unemployed households grew by only 11 per cent.

“Income differences did not grow during the recession of the 1990s because social security functioned as a safety net. The recession did leave a permanent mark on employment and unemployment rates,” the report states.

VATT also drew attention to a correlation between labour market inequality and social inequality. While over two-thirds (67%) of 25–60-year-old men without earned income had a partner in 1987, the share stood at only 37 per cent in 2019.

“It appears that the significance of labour market position has increased in society. Today, low-income and unemployed people are less likely to find a partner than before. This is evident especially among men, but the development has been in the same general direction for women,” the researchers said.

The inequality study is part of Deaton Review of Inequalities, a project launched in 2019 by the London-based Institute for Fiscal Studies. Finland is one of 17 countries covered by the project, which examines not only labour market inequalities, but also factors such as education, social security, taxation and gender disparities.

Aleksi Teivainen – HT