Browsing by Author "Valve, Juhani"

This master’s thesis examines the incidence of indirect taxation in Finland. The purpose is to investigate how regressive or progressive this taxation is. A structural analysis of tax burden is performed to discover the origin of regressive and progressive influences. Further, a microsimulation model is used to estimate the distributional impact of the rate structure of value-added taxes. The tax burden of Finnish private households is calculated based on household-level consumption data from two Household Budget Surveys. The more recent 2016 survey is used to estimate value-added tax payments and the older 2012 survey is used to estimate all indirect tax payments. A household’s relative tax burden is first measured by dividing its tax payments by its disposable income. The income share of tax payments is used to estimate short-term impact and for evaluating the entire taxation system. Relative tax burden is then also measured by dividing tax payments by consumption expenditure. Expenditure shares are used to measure long-term and structural effects. The effect of reduced value-added tax rates is analyzed by simulating a tax reform. In this tax reform, reduced VAT rates are removed and all the affected goods and services are transferred to the standard value-added tax rate. The simulation assumes a perfect transmittance of tax rate changes to consumer prices and a unit price elasticity of demand. The main results and the simulation are finally recalculated using an alternative set of specifications. These specifications come from a 2014 report on the distributional effects of consumption taxes in OECD countries. The recalculation serves as a robustness check and provides figures which can be used in international comparisons. The most important difference between the OECD model and the main model of this thesis is that the OECD model does not utilize imputed rent or include housing expenses. Indirect taxes in Finland are regressive in the short-term and slightly progressive in the long-term. The regressive influence originates from taxes on food, alcohol, tobacco and communications. A progressive influence is found in taxes on transportation. Reduced value-added tax rates have a minor progressive effect on the whole, but this noticeably declined from 2012 to 2016. The decline happened because of changes in consumption structure. Using OECD specifications leads to similar results, except that the long-term effect of value-added taxes is estimated to be proportional, whereas it is weakly progressive according to the main results of this thesis. Compared to other nations, Finland is a fairly typical OECD country.