Preparation and implementation of the removal of incentive traps

In the removal of incentive traps, unemployment, income, bureaucracy, and information traps should be examined as a whole. The expertise of the implementers and the existing knowledge base should be utilized as widely as possible in the legislative drafting.

The topic of the NAOF’s audit was the preparation and implementation of the removal of various incentive, bureaucracy, and information traps related to the social security system, taxation, and enforcement. The audit focused on four legislative measures aimed to increase incentives to work or start a business.

The NAOF decided to conduct the audit because increasing the incentives to work through taxation, social security, and enforcement has been the goal of several governments. Various incentives and incentive traps are also at the centre of the preparatory work related to the social security reform.

Based on the audit, the delays in the payment of adjusted unemployment benefits have become shorter, which means that the uncertainty caused by the reconciliation of earned income and unemployment security has been reduced. Starting a business while receiving unemployment benefit has also become at least partly easier. However, the criteria on the basis of which business activities are assessed to be full or part-time in nature remain unclear, and there are differences in interpretations between the TE Offices. The assessment affects a person’s right to receive unemployment benefit, and the ambiguity may create uncertainty for those considering starting a business. The right to a deferral of garnishment of wages or salary is not an efficient means of removing incentive traps for debtors in enforcement. Fulfilment of the criteria set for the right to a deferral has also proved difficult in practice, and a significant number of applications for a deferral are rejected. The audit findings suggest that taxpayers are not particularly familiar with the differences in the taxation of earned income and unemployment security. In addition, the majority of the recipients of unemployment benefit do not feel that a lower tax rate on earned income than on unemployment security or the reduction in benefits have a significant impact on their willingness to take up work.

The NAOF recommends that, in the preparation of the social security reform, special attention be paid to possible overlaps between various incentive traps. In the preparation of reforms aiming at the removal of incentive traps, it should be examined whether there are other traps in the legislation or implementation that may hinder the achievement of the objectives. The responsible ministries and agencies should provide sufficient information to the key target groups on the reforms concerning incentives related to social security and taxation. In addition, the existing knowledge base and the expertise of the implementers should be utilized as widely as possible in the legislative drafting aiming to increase incentives. This might reduce the risk of bureaucracy and information traps.