The Societal Costs of Taxation – Policy Recommendations for Finland

This brief examines the societal costs of taxation using international economic research literature and the Marginal Value of Public Funds (MVPF) framework. The analysis covers major tax categories that account for the majority of Finnish central government tax revenues. The results show that economic agents respond to taxation through behavioral changes, but the magnitude of these responses varies substantially across tax bases. Taxes on highest labor incomes generate particularly large welfare losses and depending on the initial level of taxation a decrease in these tax rates are self-financing in many cases. In contrast, value-added taxation, for instance, appears, on average, less distortionary. Regarding policy work, the fiscal adjustment should avoid increasing the most harmful taxes and instead emphasize less distortionary revenue sources.