At the Limits of Taxation: Perspectives on High Marginal Tax Rates in Finland

We examine the effects of Finland’s highest marginal income tax rates by integrating traditional analytical frameworks, recent empirical evidence, and dynamic macroeconomic mechanisms that shape income formation and the economy’s growth potential. Based on our comprehensive assessment, the decision to lower marginal tax rates in spring 2025 appears justified. Our calculations, grounded in the traditional framework (Saez, 2001; Saez et al., 2012; Piketty et al., 2014), indicate that within the top percent of the earnings distribution—where the most recent evidence of behavioral responses to taxation among high-income groups is clearest—the revenue-maximizing marginal tax rate remains below the current level over the long term. Dynamic behavioral effects play a central role when evaluating the economic impacts of high marginal tax rates. While the traditional approach provides a useful starting point for estimating the tax rate that maximizes revenue, it relies on assumptions that may underestimate the adverse effects of taxation. In this report, we broaden the analysis by reviewing modern macroeconomic literature, which emphasizes career-long effort, accumulation of human capital, and mechanisms and externalities related to business dynamics.