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Following the publication of Thomas Piketty’s magnum opus Capital in the Twenty-First Century (2014a) and his subsequent work Capital and Ideology (2020), much attention has been paid on taxation as a driving cause behind changing income inequality from the 1980s and 1990s onward. In Finland, the work of Piketty and his colleague, Emmanuel Saez (e.g., Piketty & Saez, 2003), has received the attention of leading inequality scholars, including the economists Marja Riihelä, Risto Sullström and Matti Tuomala (e.g., Riihelä et al., 2005). Following Piketty & Saez, these authors have arrived at the conclusion that changes in income inequality in Finland during the 1990s and early 2000s can be attributed to changes in income taxation at the beginning of the 1990s. Riihelä et al. argue that the introduction of the so-called Nordic dual income tax (1993) lowered the effective tax rates on top capital incomes vis-à-vis wages and salaries, thus increasing the incentives of transforming the latter into more favorably treated capital incomes. This paper seeks to criticize the Riihelä et al. explanation on the grounds of tax history and changes in Finnish companies’ profitability. It is proposed that the chain of causation needs to be taken beyond taxation and into the creation of income in businesses and corporations, as well as its distribution. The paper shows that the firms’ payout ratio has remained surprisingly stable apart from the tumultuous years of the early 1990s depression. Although taxation has probably affected the composition of the firms’ payout, it has, on average, had a much lesser impact on its level. While taxation may have amplified the changes in after-tax income inequality, it has not been their fundamental cause. It is argued that profitability may hold the key to these shifts in income inequality. Firm ownership in Finland, as elsewhere (e.g., Bengtsson & Waldenström, 2018) has been highly concentrated in the top-most fractiles (for example, the top 1% or 0.1%). Given the fact that these fractiles’ income has historically been contingent on profits (even if paid in wages or fringe benefits, for example), it is argued that the changes in Finnish income inequality during this period have been very much a top-level phenomenon. It is also argued that these results may provide impetus for similar research in other countries, as well. The paper’s research period coincides with a U-shaped trend in profitability and income inequality. First, both profitability and income inequality decreased from the 1960s until a deep depression in the beginning of the 1990s. Then, during the 1990s, inequality and profitability rebounded, leveling off after the turn of the millennium. The paper uses Finnish taxable income and wealth statistics as its primary source of income data. National accounts data is used for estimating business and corporate profitability. Additional survey-based data on Finnish households’ income is used for robustness checks. Additionally, the paper uses secondary sources on tax legislation, firm ownership and capital structures to support its argument. Methodologically, income shares are estimated using a generalized Pareto curve interpolation developed by Blanchet et al. (2017). The impact of the 1993 tax reform as well as its late 1980s and early 1990s predecessors are assessed in terms of marginal tax rates and elasticity of taxable income. Finally, the medium-term dynamic impact of the interaction of profitability and payout, the so-called payout rate of response, is measured on the top 1 percent taxable income share. Non |
