Tax research

FIT research falls under several broad, interlinked topics covering both sides of the crucial trade-off related to tax system design. We analyze how taxes and regulation can tackle societal problems, but also focus on the other side of the trade-off, that is, measuring the societal costs of taxation.

The key to tax systems research is to adopt a broad view of institutions: we analyze the effects of multiple tax instruments, benefits, related regulation, and administrative rules. At the same time, we adopt a realistic view of the way in which individuals make economic decisions, allowing for the details of the system and complex rules to affect decision-making. Our research provides important missing pieces to the puzzle of how to design a good tax system, as well as new insights about the way in which fundamental economic decisions are made by individuals and within firms.

Work Package 1: Inequality

Inequality and tax are intertwined in various ways. A fair tax-transfer system alleviates economic hardship and contributes to reaching a sufficiently equitable after-tax income distribution. To achieve this, one needs reliable information about the pre-tax distribution of income and wealth. That is why we examine the income and wealth distribution in Finland in a comprehensive manner, utilizing novel data sources, such as the wealth encapsulated within firms and wealth held abroad. At the same time, we investigate the sources of inequality in income and wealth. These are related to both market-driven reasons, such as globalization, and governmental policies, e.g. labour market regulation. We build on the new empirical findings in our theoretical research on the relative merits of trying to influence the income differences arising in the market economy (‘predistribution’) versus using tax and transfer policies (redistribution).

The work package also examines how inequality may be affected by reforming tax and transfer policies. At the centre stage of this work is experimental research. We continue to investigate the impacts of the Finnish basic income experiment and explore possibilities to conduct new field experiments within the social insurance system. Further, we analyze the consequences of inequality and relative income concerns on individual well-being and economic decision-making, through an incentivized survey experiment.

Principal Investigator: Jukka Pirttilä, University of Helsinki

Work Package 2: Environment and health

Some of the most pressing challenges societies are facing relate to climate change and public health problems associated with unhealthy habits. A common policy solution is to direct consumption or production using taxes or regulation. But from earlier research we know surprisingly little about how effective these measures are. For example, research on sin taxes has not converged to whether and when such taxes are effective in reducing unhealthy consumption. In the environmental domain, there is relatively little research on the effectiveness of policies aiming to reduce emissions, such as subsidies or infrastructure investments for increasing the share of electric cars in the car fleet.

We use reliable data and research methods to assess whether and under what conditions these measures are effective in meeting policy goals. We aim to plan and implement randomized experiments to evaluate new solutions to these problems in an environment of rapid technological change.

Principal Investigator: Tuomas Kosonen, VATT Institute for Economic Research


Work Package 3: Societal costs of taxation

This work package analyzes various ways in which people and firms react to taxation, and how these reactions affect welfare and tax revenue. How does labour supply react to taxation? How do taxes and benefits affect parental labour market participation choices, and long-term outcomes and welfare of both parents and children? Do workers react to high taxation by emigrating to low-tax countries? Do people change their consumption patterns for tax reasons? Who pays the burden of taxes?

The answers to these questions are informative about the effects of taxes on economic activity, and hence the size of the welfare state that can be sustained. We provide a methodological contribution to measuring labour supply responses, and hence the excess burden of income taxes. We examine multiple margins of reactions to policy (labour supply and labour market participation, migration and evasion), as well as various outcome measures beyond income and employment (health, child outcomes).

Principal Investigator: Kaisa Kotakorpi, Tampere University

Work Package 4: Productivity, firms and entrepreneurship

Firms and entrepreneurs form the backbone of modern economics and drive the development of job creation, innovation and productivity. We study how the tax system including tax rates, administrative rules and overall regulation affect firm performance – firm birth, growth, and exit rates, as well as productivity. We also examine how tax policy affects entrepreneurship and income inequality.

Our aim is to provide rigorous and novel evidence on the fundamental question of how production and other economic decisions are made within firms. We also expand the current knowledge of how value is created within firms, and how it is distributed between workers and capital owners.

Principal Investigator: Jarkko Harju, Tampere University