A report from International Monetary Fund (IMF) has advised Finland to undertake tax & welfare reforms to further improve its laudable welfare system.

According to 'Selected Issues' Report (SIR) on Finland, marginal effective tax rates (METRs) for upper-middle income workers could be lowered to increase labor supply and earnings. This could even be done in revenue-neutral terms".

As put by SIR, "These (METRs) appear to be on the wrong side of the Laffer curve, so that rate cuts could even be self-financing".

SIR, released on 15th January 2020, has recommended increase in support for low-wage and part-time workers through higher and means-tested in-work benefits. This could substantially increase employment rates.

It has also proposed improved targeting of out-of-work benefits, especially for secondary earners, could increase fiscal space and improve labor supply incentives.

IMF staff has made these recommendations after undertaking microsimulation analysis. It shows that, despite strong redistribution and high level of incomes, Finland could improve its tax and benefit system.

SIR says: "Even for revenue-neutral reforms, economic gains in terms of labor supply and earnings could be substantial. The reform proposals take into account Finland's strong preferences for equity, while seeking to correct potential inconsistencies in how the tax burden is distributed".

It observes that the Finnish social welfare system has supported high income levels alongside low inequality. However, disincentives from high tax rates can weigh on labor supply and the state's capacity to finance generous levels of spending and social protection.

SIT believes that a comprehensive reform of the tax-benefit system could support the government's objective of increasing employment. The equity-efficiency trade-off of the proposed reform scenarios improves social welfare when using Finland-specific preferences.

Another IMF document, Staff Report (SR) on Finland, has also pitched for tax reforms. It says: "Improved tax and benefit incentives could boost employment. The government could look at leave and home care benefits, which generate incentives for women to stay at home, and tax and benefit schedules that mean that some face a financial penalty to work, rather than stay unemployed or out of the workforce".

It adds: "Still more could be done to increase participation and employment of older workers. Employment of older workers could be increased by further limiting early retirement. But relying on job subsidies, which are expensive and have had mixed effects in other countries, seems likely to disappoint".