Savings and Consumption

Abstract

TR91 removed the taxation of household capital income from the ordinary taxation of earned income and instituted a completely new flat-rate capital income tax of 30 per cent. At the same time, various deductions were removed or reduced, and the value of interest deductions for households was set at 30 per cent. Apart from the explicit objective of stimulating saving and decrease indebtedness, the new capital income tax was intended to provide an important contribution to the financing of the reform. It was also to help make TR91 distributionally neutral, since the lowered marginal tax rate on the earned income of high-income individuals would be counteracted by higher taxes on their capital income. Fiscal aspects were also an important reason for the overhaul of indirect taxation, which was carried out as an integral part of TR91. Before TR91, at most 60 per cent of private consumption was affected by VAT TR91 broadened the tax base, and increased various other commodity taxes.