EP195 · Economy · first published 2023-06-09
Cut the Taxes: Finland the Hardest Taxer | Elias Erämaja | Negotiator 195
Elias Erämaja, chief economist of Suomen Ekonomit, on Finland's marginal tax rates. The number that matters is not the near-60 per cent top rate but that it bites at roughly 1.8 times the average wage, where other countries reach the same level at 30 times. Erämaja explains why rigid labour supply does not defeat the argument: the damage shows not in the employment rate but in people declining demanding jobs. Includes the solidarity tax's exact timeline since 2013, the 58 to 180 per cent self-financing estimates from Sweden's abolition of its own, the 45,000 net immigrants needed to stabilise the dependency ratio, and how taxation tightened unnoticed as index adjustments to the tax schedules fell behind inflation. Made in commercial collaboration with Suomen Ekonomit ry. Published 9 June 2023.
Cut the Taxes: Finland the Hardest Taxer | Elias Erämaja
Summary: In episode 195 Sami Miettinen interviews Elias Erämaja, chief economist of Suomen Ekonomit (the Finnish Business School Graduates), about Finland’s marginal tax rates. The number that matters is not the near-60 per cent top rate but where it bites: at roughly 1.8 times the average wage, where other countries reach the same level many times higher up. Recorded in June 2023, during the final week of government formation talks. Published 9 June 2023.
Commercial collaboration. This episode was made in commercial collaboration with Suomen Ekonomit ry, stated both in the episode and in its published details.
The guest, and why his background matters here
Erämaja is chief economist of Suomen Ekonomit. His career is worth knowing before reading his positions: he spent about ten years on the employer side — as an economist at the service sector employers’ association and at Medialiitto — before crossing the tracks to Akava’s Ekonomiliitto. His own description is that Suomen Ekonomit is “a slightly different trade union from what people generally imagine”, close in values to what economists generally think; a move to Hakaniemi, the traditional home of the blue-collar union movement, he could not have imagined.
Miettinen recognises the same move from his earlier episode with Minna Helle, who crossed in the opposite direction, from the employee side to the employers’.
The membership is no longer only business graduates: Erämaja himself is a Master of Social Sciences with economics as his major, and the master’s programmes at the University of Helsinki, Hanken and Aalto are now largely shared. Miettinen’s description of an ekonomi as a “Swiss army knife” of the economy draws a correction: a very heterogeneous group, mostly specialists, managers and directors.
Pay: up nominally, backwards in real terms
The members’ median salary last year was €5,400 a month. Nominally it has grown over ten years — though, Erämaja says, not significantly — and adjusted for inflation it is below where it was ten years ago.
That is the episode’s starting position: a well-educated specialist’s real earnings have completed a ten-year round trip back to the starting point while taxation tightened.
The marginal rate: the real figure is the income level it starts at
Erämaja puts Finland’s top marginal rate at close to 60 per cent — depending somewhat on how it is calculated — and calls it internationally top-tier. In Europe the UK is, he says, slightly higher; globally perhaps South Korea. Miettinen notes he has seen Belgium placed above Finland, and concedes the uncertainty: comparisons depend on how employer and pension contributions are allocated into the figure.
But the episode’s real finding is not the peak rate; it is where it begins. In Miettinen’s words, “this almost two-thirds robbery happens at really low levels” — at roughly 1.8 times the average wage — where there are countries in which the equivalent level only bites at 30 times the average wage. Erämaja confirms it and adds that 50 per cent is already reached in the middle-income bracket.
The Sweden comparison is precise: Finnish marginal rates are higher in practically every income bracket, save a narrow window around €75,000. In absolute terms Finland is actually competitive at low incomes — lower than Sweden — but at middle incomes a “vast gap” opens in Sweden’s favour. Against the EU average the shape is the same: at the bottom Finland sits on the average, and the wedge widens with income.
The cause is the direction of policy: when tax cuts are aimed at the lowest brackets — €200 million last parliamentary term — progression sharpens for the middle, and the solidarity tax stays in place.
Why “labour supply is rigid” is not the counter-argument
This is the episode’s most analytically valuable passage. Erämaja accepts that in microsimulations labour supply looks rigid, and that it probably is: a person has to be in some job, and you do not pack your things overnight and move to Estonia or Sweden chasing a lower rate.
But the simulations do not capture the mechanism that actually bites. When a specialist is offered significantly more responsibility — line management — and up to 60 per cent of the raise is taken, the person who ought to take the demanding job does not take it, and somebody else does. The damage therefore does not show in the employment rate but in the allocation of talent and in hours worked. Miettinen’s summary: the employment rate can rise while hours worked do not, because the marginal value of leisure is so high. The other route to the same place is unpaid leave, where the taxman “settles up in reverse for half of it or more”.
Miettinen recalls here that the union movement’s favourite bogeyman, Nalle Wahlroos, once trolled the debate by proposing to tax leisure instead — the mirror image of a corrective tax: what you tax more of, you get less of.
The solidarity tax: a temporary tax since 2013
Erämaja’s timeline is exact and is the episode’s most quotable stretch:
- Introduced in 2013 as temporary, intended to end with the 2015 parliamentary term.
- The threshold then was €100,000.
- Under Sipilä’s government it fell as low as about €72,800.
- This year the threshold is €85,800.
- To preserve the original intent adjusted for inflation, it should apply only above about €120,000.
Technically it is two percentage points stapled onto the top state income tax brackets. Erämaja’s worry is structural: a temporary tax threatens to migrate into the permanent structure. It should expire at the end of this year, and he hopes the next government does not extend it.
The Swedish comparison is what makes the passage interesting. A social-democrat-led government abolished Sweden’s solidarity tax and cut top rates by five percentage points. In the extensive preparatory analysis, the most pessimistic estimate was that the change would finance 58 per cent of itself, with the other end of the range above 180 per cent. Erämaja expects a similar effect in Finland because the starting level is equally high: a statically calculated loss of a good hundred million could turn into added revenue.
Laffer, and why to talk about it carefully
Miettinen describes calculating a Laffer curve on total tax rates for a blog post and getting “entirely deserved pushback” — the criticism being that the curve does not work at the aggregate level and each tax must be examined separately. He still holds to the observation that total tax revenue has previously risen when taxation was loosened, and that the total tax rate rose this term from 41.8 per cent to 43.2 per cent.
Erämaja offers a concrete example that requires no Laffer argument: cutting the corporate tax rate brought more money into the Finnish treasury.
Miettinen discloses his own interest here: his firm Translink Corporate Finance has contributed a small donation towards establishing the Aalto University professorship of ownership, and he cites Samuli Knüpfer’s research finding Finland by far the poorest at the wealthy end of the Nordic comparison. His conclusion is that high taxation prevents wealth from accumulating and businesses from forming.
Estonia, and who Finland is competitive for
Estonia’s flat tax — around 21.3 per cent by Erämaja’s recollection before the then government, plus employer contributions — inverts the picture. In the lowest brackets a Finn’s net earnings can, purchasing-power adjusted, be lower than an Estonian’s. At specialist level the gap is “unbelievably large” against Finland.
Erämaja’s summary is uncomfortable and precise: Finland is relatively competitive at attracting lower-income people, and not competitive at attracting high-skill people. He balances it immediately — the nursing shortage is severe and everyone is needed — but holds that high-skill jobs and investment should also be attracted here.
The wellbeing services counties and the shape of taxation
When more than half of the previously non-progressive municipal tax was moved to the state, Erämaja sees several consequences. The state became “a kind of vending machine” financing counties in serious difficulty — in practice, for instance, Uusimaa residents financing it out of their own pay packets, where income used to be equalised through other mechanisms. The second consequence is that healthy tax competition between municipalities weakens: the calculation of whether to move to Kauniainen or stay in Espoo flattens out.
Tax rates were locked in the transition so that nobody’s taxation would immediately rise — but, Erämaja notes, that will not hold forever, and once municipal councils no longer decide, the risk is that pressure on the taxpayer’s pocket simply grows.
Miettinen names the problem: taxation without representation — a mismatch in which the county can exploit the state. He is nonetheless against a fourth tax layer in Finland (counting an EU tax), because separate taxes start living their own growth-oriented lives. He recalls interviewing Sari Essayah, who firmly opposed making the county levy a separate tax, and expects the government programme not to break that link. Erämaja agrees and adds the economists’ standard position: those who spend the money and decide on it should also levy it and answer for it to voters.
Three wishes for the government programme
Erämaja’s own list, which the episode builds towards:
- Lighter income taxation in all brackets, and lighter progression. The model is Sweden, which has reduced progression consistently over time.
- Substantially more work-based immigration. This is the episode’s heaviest set of numbers: stabilising the dependency ratio requires about 45,000 net immigrants, against a long-run level of about 15,000 with the forecast continuing at that level; last year reached a little over 30,000, which was good but not enough. Without correction, people aged 85 and over become the largest five-year age cohort as early as the 2050s and the population pyramid inverts. The new government’s 80 per cent employment rate and 100,000 additional employed are, he says, fine goals — but not sufficient on their own.
- Productivity. That requires investment, attractiveness to high-skill people, and R&D incentives for companies and universities — including some public money.
A short technical exchange follows on productivity: the metric is euros per hour worked (OECD), and Finland’s collapse is partly explained by having had more high-productivity jobs before the financial crisis — Nokia, and forest industry products selling differently. Erämaja cites a just-published ETLA and Labore study finding that productivity development in other industrial sectors has been fine while services have stalled. Miettinen’s remark that barbering efficiency has not changed in millennia is the same point, lighter.
Purchasing power and index adjustments: a tightening nobody decided
The last stretch is the one to read if you read only one.
Purchasing power. Erämaja says it fell last year by as much as it did in the 1977 oil crisis, and that by the first quarter of this year households’ real purchasing power had collapsed to its 2008 level, before the financial crisis. Nearly fifteen years wiped out.
Index adjustments. Income tax schedules are adjusted by the earnings index. That was a natural choice in a low-inflation world where earnings outran inflation — but inflation has now outrun earnings, and the adjustment is additionally based on a finance ministry forecast made well in advance. The figures:
| Year | Index adjustment | Actual / forecast inflation |
|---|---|---|
| 2022 | 3.0 % | 7.1 % |
| 2023 | 3.5 % | about 5 % |
Taxation has therefore tightened “almost unnoticed” — not by a decision to raise taxes but by leaving the schedules uncorrected. Erämaja’s normative conclusion is that the state has a role here: in such a situation tax policy should not further weaken purchasing power.
Miettinen adds his own observation that the total tax rate rose from 41.8 to 43.2 without many new taxes being introduced — it was precisely the index adjustments that fell short — and that the finance ministry’s GDP forecasting accuracy has weakened. His example is the official first-quarter growth figure, which diverged materially from the flash estimate published a week earlier: it was supposed to be above one and came in near zero.
The conclusion
Erämaja and Miettinen’s shared summary: absolute income thresholds in Finland are very low, marginal rates very high, and index adjustments are withheld — the tax screw is tightened from every direction at once, and there is no proper debate about it. Erämaja’s wish is that the debate rest on economic argument and on the analysis already done, rather than being shut down at the outset by asking why you want to increase high earners’ net income.
A note on the source
The transcription contains one gap of about 28.4 seconds at 00:09:49, between the Wahlroos thought experiment and the solidarity tax section. Speech resumes in short fragments (“At the state labour camp”) whose opening was not recorded. This article is written only from what the transcript contains; the gap has not been filled by inference.
The episode was transcribed with MacWhisper and the transcript carries no speaker labels; with a single guest the speakers are reliably distinguishable. The cleaned cue file corrects proper names the automatic transcription mangled — among them Nalle Wahlroos, Samuli Knüpfer and Sari Essayah. A few unclear expressions were not guessed at.
Watch
The recording lives on the Neuvottelija channel: Verot alas Suomi kovin verottaja | Elias Erämaja | Neuvottelija 195.