Taxation is Needed for Good Basic Services

The basic services and the welfare state are important for Finland, a small country that has an inclement climate, a huge geographical and a tiny population of 5,5 million people. Finns have to trade in the foreign markets to maintain its economic health and our high standard of living because the national market is too small. Finland is even more remarkable given that it has a 1000 km border with Russia, a huge country that has enormous oil and gas reserves, and many other important raw materials and yet Finland’s GDP per capita is around five times that of Russia! 

But let’s get back to the story. Martin Wolf and Paul Krugman have often written about Finland’s remarkable long-term economic success as an open economy in the global markets.

 Paul Krugman is a serious Nobel-winning economist who wrote the following quote in a recent New York Time’s opinion “Can the Rich Pay for a Better America?”, NYT 03.06.2021:

“The unserious critique is the claim that raising taxes on corporations and high incomes would cripple the economy. Assertions that prosperity depends on keeping taxes at the top low have been refuted by experience time and time again — most recently in the failure of the Trump tax cuts to deliver the promised immense investment boom…

…The only reason the obsession with low taxes for the rich retains any influence is that keeping this zombie shambling around serves the interests of corporations and the wealthy. So let’s not waste time on it.”

Our right-wing Finnish economists, the noisiest ones who are celebrated daily in the two major media companies, have all been to the same school where the Protestant virtues of austerity and small government are taught assiduously. 

This is what these economists preach, but actions speak another story and in practice it means something totally different. They demand that the public sector provide schools, vocational colleges and universities, good public healthcare, good infrastructure for digital solutions, transport, power transmission and other basic utilities, including modern harbours and airports. Naturally they are unwilling to pay for these services themselves. The list of demands is quite impressive while they continue to demand lower taxes for the highly paid executives with the rational that these people will work harder if paid more! On the other hand they seek to pay their own ordinary workers the lowest possible wages! 

Lower taxes are also demanded in sharp contrast to Krugman’s above opinion article – they spouting myths at the same speed and as often as Trump’s spurious claims – as Krugman writes:

“The obsession with low taxes… …serves the interests of corporations and the wealthy”

But there are good reasons to dig deeper about taxes… many of the very well paid Finns in big companies and those wealthy families have very little or no risk for losing their income or wealth tomorrow. Most of them have huge golden handshakes, big guaranteed pensions, and plenty of lawyers to protect their savings and wealth. They appear to ignore the fact they and they children have enjoyed the fruits of current and past workers who have paid for those basic services that have nurtured and protected them from their birth to the present. 

They should continue to pay their fair share of taxes without moaning because they have almost no skin in the game. But there are two other groups of important people who would really benefit from lower taxes who are important for growth of the whole economy. 

The first group are entrepreneurs of smaller non-listed companies who work long hours to grow their companies, with limited resources, and who face tough competition in foreign markets. Finland does not a have a deep equity market – funds for risk investments relatively limited than elsewhere in the western world and our national market is too small to support growth companies.   

In many cases, the people running these companies risk everything. They have no guarantee that they will succeed and strong probabilities that they can fail. These men and women are the dynamos of growth, unlike the big incumbents that have easy access to bank funding and the capital markets. Lower taxes for these entrepreneurs could free up much needed working capital and cash for investments.

The second group who deserve to be eligible for lower income taxes should be skilled and experienced pensioners who are willing to work to remain in touch with the real economy and remain active. These people can really contribute through past experiences and networks. Currently they are already paying high marginal income tax rates because taxation on pensions is higher than for ordinary wage earners. Any earned income is currently subject to the progressive income tax rates on top of their pension. This is both counterproductive and unfair. Reducing their tax rate would increase their willingness to work while probably reducing healthcare costs because active pensioners are less susceptible to illness. Social activity keeps people healthy and lowers public sector healthcare costs.

The other big topic associated with taxation is public sector borrowing. The two topics go hand in hand and both are treated by the right in the same way. According to these people, taxation and borrowing need to be kept lower unless it conflicts with their own (selfish) interests. For this reason alone it is important to vote for politicians who understand that a welfare state can only function when all taxpayers pay their fair share, with lower levels of income and wealth inequality. 

And a final point – can anybody on the right please explain why income inequality has risen since WW2? Data from a variety of sources contribute to a picture of strong growth and shared prosperity for the early postwar period, followed by slower growth and growing inequality since the 1970s. Krugman writes: “The growing income gap poses a danger to the well-being of our economy.” 

One can easily speculate that increased income inequality explains why the Finnish economy has not been doing as well as it should the last two decades, but more of that later…

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