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Dual Income Taxation: Why and how?

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  • Peter Birch Sørensen
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    Abstract

    The dual income tax combines a progressive tax schedule for labour income with a low flat tax rate on capital income and corporate income. This paper restates the case for the dual income tax and discusses alternative methods of taxing business income under such a tax system, paying special attention to the taxation of income from closely held corporations. It is argued that the imputed normal return to shares in unlisted companies should be taxed as capital income, while above-normal returns should be subject to labour income tax. The paper demonstrates that such a tax scheme can be designed to be neutral towards the firm’s investment and financing decisions and towards the decisions of shareholders to realize their shares.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-09/cesifo1_wp1551.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1551.

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    Date of creation: 2005
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    Handle: RePEc:ces:ceswps:_1551

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    Keywords: dual income tax; tax neutrality; taxation of business income; shareholder income tax;

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    1. Bovenberg, A.L. & Gordon, R.H., 1996. "Why is capital so immobile internationally? Possible explanation and implications for capital income taxation," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-73564, Tilburg University.
    2. Per Krusell & Lee E. Ohanian & Jose-Victor Rios-Rull & Giovanni L. Violante, 1997. "Capital-skill complementarity and inequality: a macroeconomic analysis," Staff Report, Federal Reserve Bank of Minneapolis 239, Federal Reserve Bank of Minneapolis.
    3. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1086-1102, December.
    4. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 6(1-2), pages 55-75.
    5. Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer, Springer, vol. 6(1), pages 79-88, February.
    6. Alan A. Auerbach & David F. Bradford, 2001. "Generalized Cash Flow Taxation," NBER Working Papers 8122, National Bureau of Economic Research, Inc.
    7. Robin Boadway & Neil Bruce, 1988. "Problems with Integrating Corporate and Personal Income Taxes in an Open Economy," Working Papers, Queen's University, Department of Economics 735, Queen's University, Department of Economics.
    8. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Peter Sørensen, 1994. "From the global income tax to the dual income tax: Recent tax reforms in the Nordic countries," International Tax and Public Finance, Springer, Springer, vol. 1(1), pages 57-79, February.
    10. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
    11. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 63(3), pages 311-329, February.
    12. Martin D. Dietz & Christian Keuschnigg, 2005. "A Growth Oriented Dual Income Tax," CESifo Working Paper Series 1513, CESifo Group Munich.
    13. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, Elsevier, vol. 79(1), pages 55-69, January.
    14. Christoph Spengel & Wolfgang Wiegard, 2004. "Dual Income Tax: A Pragmatic Tax Reform Alternative for Germany," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 2(3), pages 15-22, October.
    15. Wolfgang Eggert & Bernd Genser, 2005. "Dual Income Taxation in EU Member Countries," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 3(1), pages 41-47, 04.
    16. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, Elsevier, vol. 12(1), pages 1-26, August.
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    Cited by:
    1. Annette Alstadsæter & Erik Fjaerli, 2009. "Neutral Taxation of Shareholder Income? Corporate Responses to an Announced Dividend Tax," CESifo Working Paper Series 2530, CESifo Group Munich.

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