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Thu, 18 Jun, 2015 12:13:45 AM FTimes Report, June 18  File Photo Lehtikuva. Tax subsidies and direct subsidies seem to have a positive impact on companies’ innovation activities, according to a study published by the Government Institute for Economic Research (VATT) on Wednesday.
The effects are significant for small businesses in particular, said the report, adding that most of the subsidy funds go to large companies.
According to the study, correctly targeted subsidies can promote economic growth effectively, said an official press release.
Around euro 1.3 billion in direct business subsidies is distributed in Finland annually.
In addition, tax subsidies influencing business activity amount to around euro 6 billion. Of these, value-added taxation accounts for around euro 3 million and excise duty taxation for around euro 2 million, with the remainder being various business tax subsidies.
The VATT study has estimated the effectiveness of direct subsidies and tax subsidies in the light of economic research literature.
The study was carried out as part of the implementation of the Government’s 2014 plan for analysis, assessment and research.
The study found that investment subsidies do little to increase new investments, and public aid received by large companies often displaces private funding in investments.
According to the study, employment and low-wage subsidies have no impact on employment or business productivity.
The subsidies are partly transferred to pay, but to an even greater extent they seem to remain with the companies. It would be important in the future to examine how subsidies affect companies’ total productivity over the longer term.
Tax subsidies can influence business directly or indirectly. The excise duty levels in Finland are among the highest in the EU countries, so the tax subsidy is justified by companies’ competitiveness factors.
According to the study, similar support could be implemented by reforming the subsidy structure of environmental taxation.
The study also considered reduced rates of value-added tax to be tax subsidies that affect companies’ actions.
They have a strong adverse impact on economic activity and growth, and the equalisation of income distribution sought by using them has proved to be costly and ineffective.
Exemptions from value-added tax in accordance with EU directives are not considered to be a tax subsidy in Finland. They do, however, narrow the tax base and increase tax rates.
A broad tax base and single tax rate model would seem to have a positive impact on growth, employment and the budgetary balance. This is due to the fact that the standard rate can thereby be reduced by several percentage points while maintaining tax revenue.
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