How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993

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How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993

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Jukka Pirttilä ()
Håkan Selin ()

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Jukka Pirttilä

Abstract

Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1875.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1875

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Paper
- Pirttilä, Jukka & Selin, Håkan, 2006. "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993," Working Paper Series 2006:26, Uppsala University, Department of Economics. [Downloadable!]

Find related papers by JEL classification:
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

This paper has been announced in the following NEP Reports:

NEP-ACC-2007-01-02 (Accounting & Auditing)
NEP-ALL-2007-01-02 (All new papers)
NEP-PBE-2007-01-02 (Public Economics)
NEP-PUB-2007-01-02 (Public Finance)

References listed on IDEAS
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Lindhe, T. & Sodersten, J. & Oberg, A., 2001. "Economic Effects of Taxing Closed Corporations under a Dual Income Tax," Papers 2001:16, Uppsala - Working Paper Series.
Other versions:
- Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2001. "Economic Effects of Taxing Closed Corporations under a Dual Income Tax," Working Paper Series 2001:16, Uppsala University, Department of Economics. [Downloadable!]
Roger H. Gordon & Jeffrey K. MacKie-Mason, 1992. "Tax Distortions to the Choice of Organizational Form," NBER Working Papers 4227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
- Gordon, R.H. & Mackie-Mason, J.K., 1993. "Tax Distorsions to the Choice of Organizational Form," Memorandum 21/1993, Oslo University, Department of Economics.
- Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994. [Downloadable!]
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Other versions:
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Other versions:
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Other versions:
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Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," VATT Research Reports 51, Government Institute for Economic Research (VATT). [Downloadable!]
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- Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer, vol. 8(2), pages 119-128, March. [Downloadable!] (restricted)
Robert Carroll & Warren Hrung, 2005. "What Does the Taxable Income Elasticity Say about Dynamic Responses to Tax Changes?," American Economic Review, American Economic Association, vol. 95(2), pages 426-431, May. [Downloadable!] (restricted)

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