The Societal Costs of Taxation – Policy Recommendations for Finland

Olli Ropponen

No 172, ETLA Brief from The Research Institute of the Finnish Economy

Abstract: Abstract 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.

Keywords: Welfare Costs of Taxation; Optimal Taxation; Behavioral Responses to Taxation; Marginal Value of Public Finds (MVPF) (search for similar items in EconPapers)
JEL-codes: D61 H21 H24 H25 H30 (search for similar items in EconPapers)
Pages: 6 pages
Date: 2026-01-19
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