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The Dual Income Tax and Firms' Income Shifting through the Choice of Organizational Form and Real Capital Investments

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  • Annette Alstadsæter

Abstract

The dual income tax provides the self-employed entrepreneur with huge incentives to participate in tax minimizing income shifting to have more of his income taxed as capital income. The Norwegian split model is designed to remove these incentives, but it contains loopholes. The present paper concludes that the split model induces the self-employed entrepreneur to over-invest in firm real capital. In addition, the corporate organizational form serves as a tax shelter for high income entrepreneurs. The higher his income and the higher the difference between the marginal tax rates on labor and capital, the larger the incentives to incorporate.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1018.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1018

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  1. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(2), pages 477-505, June.
  2. Jane G. Gravelle & Laurence J. Kotlikoff, 1987. "The Incidence and Efficiency Costs of Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Good," NBER Working Papers 2462, National Bureau of Economic Research, Inc.
  3. Erik Fjaerli & Diderik Lund, 2001. "The choice between owner's wages and dividends under the dual income tax," Finnish Economic Papers, Finnish Economic Association, Finnish Economic Association, vol. 14(2), pages 104-119, Autumn.
  4. Clemens Fuest & Alfons Weichenrieder, 2002. "Tax Competition and Profit Shifting: On the Relationship between Personal and Corporate Tax Rates," CESifo Working Paper Series 781, CESifo Group Munich.
  5. Gentry, William M., 1994. "Taxes, financial decisions and organizational form : Evidence from publicly traded partnerships," Journal of Public Economics, Elsevier, Elsevier, vol. 53(2), pages 223-244, February.
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Cited by:
  1. Oeffner, Marc, 2005. "Die Duale Einkommensteuer des Sachverständigenrates in der Diskussion," W.E.P. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 59, University of Würzburg, Chair for Monetary Policy and International Economics.
  2. Ruud Mooij & Gaëtan Nicodème, 2008. "Corporate tax policy and incorporation in the EU," International Tax and Public Finance, Springer, Springer, vol. 15(4), pages 478-498, August.
  3. Seppo Kari & Vesa Kanniainen & Jouko Ylä-Liedenpohja, 2007. "Nordic Dual Income Taxation of Entrepreneurs," Discussion Papers, Government Institute for Economic Research Finland (VATT) 415, Government Institute for Economic Research Finland (VATT).
  4. Seppo Kari & Hanna Karikallio, 2007. "Tax Treatment of Dividends and Capital Gains and the Dividend Decision Under Dual Income Tax," Discussion Papers, Government Institute for Economic Research Finland (VATT) 416, Government Institute for Economic Research Finland (VATT).
  5. Kiesewetter, Dirk & Lachmund, Andreas, 2004. "Wirkungen einer Abgeltungssteuer auf Investitionsentscheidungen und Kapitalstruktur von Unternehmen
    [Effects of a flat rate tax on investment decisions and capital structure of companies]
    ," MPRA Paper 27177, University Library of Munich, Germany.
  6. Ruud A. de Mooij & Gaetan Nicodeme, 2007. "Corporate Tax Policy, Entrepreneurship and Incorporation in the EU," Tinbergen Institute Discussion Papers, Tinbergen Institute 07-030/3, Tinbergen Institute.

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