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Dynamic Behaviour of the Firm Under Dual Income Taxation

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Author Info
Seppo Kari

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Abstract

This study examines certain incentive aspects of the dual income tax system (DIT) operated in the four major Nordic countries since the beginning of the 1990s. In this tax system capital income is taxed at a flat rate, whereas earned income is subject to a conventional progressive schedule. The analysis focuses on the splitting of dividend income received from a closely held firm into capital and earned income parts. A deterministic, dynamic investment model as developed by Sinn (1991) is applied. This basic model is extended in several directions. The study in chapters 2 and 3 reveals that Nordic DIT may have strong effects on the firm?s investment and financing behaviour. In extreme cases the firm?s cost of capital can even be negative. These effects may also have efficiency and welfare consequences. The study also shows that the distortions are very sensitive to the content of the capital base concept. For instance, when financial assets are included in the capital base the firm?s marginal return on capital is at the level of the nominal interest rate, thus eliminating the real distortions discussed above.

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Publisher Info
Paper provided by Government Institute for Economic Research Finland (VATT) in its series Research Reports with number 51.

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Date of creation: 01 Jan 1999
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Handle: RePEc:fer:resrep:51

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Related research
Keywords: dual income taxation; corporate taxation; investment incentives;

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Find related papers by JEL classification:
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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  1. Jukka Pirttilä & Håkan Selin, 2006. "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Tobias Lindhe & Jan Södersten & Ann Öberg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," Asia-Pacific Financial Markets, Springer, vol. 11(4), pages 469-485, August. [Downloadable!] (restricted)
    Other versions:
  3. Brys, Bert & Bovenberg, A. Lans, 2006. "The life cycle of the firm with debt and capital income taxes," Discussion Paper 91, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Harri Hietala & Seppo Kari, 2006. "Investment Incentives in Closely Held Corporations and Finland's 2005 Tax Reform," Finnish Economic Papers, Finnish Economic Association, vol. 19(2), pages 41-47, Autumn. [Downloadable!]
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  5. 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!]
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  6. Seppo Kari & Jouko Ylä-Liedenpohja, 2004. "Effects of Equalization Tax on Multinational Investments and Transfer Pricing," Discussion Papers 337, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  7. Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2003. "Economic Effects of Taxing Different Organizational Forms under a Dual Income Tax," Working Paper Series 2003:19, Uppsala University, Department of Economics. [Downloadable!]
  8. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2007. "Nordic dual income taxation of entrepreneurs," International Tax and Public Finance, Springer, vol. 14(4), pages 407-426, August. [Downloadable!] (restricted)
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  9. Seppo Kari & Hanna Karikallio, 2007. "Tax treatment of dividends and capital gains and the dividend decision under dual income tax," International Tax and Public Finance, Springer, vol. 14(4), pages 427-456, August. [Downloadable!] (restricted)
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  10. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The New View of Dividend Taxation Reconsidered," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Annette Alstadsæter & Erik Fjaerli, 2009. "Neutral Taxation of Shareholder Income? Corporate Responses to an Announced Dividend Tax," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Annette Alstadsaeter, 2007. "The Achilles Heel of the Dual Income Tax: The Norwegian Case," Finnish Economic Papers, Finnish Economic Association, vol. 20(1), pages 5-22, Spring. [Downloadable!]
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  13. Seppo Kari & Ylä-Liedenpohja & Jouko, 2005. "Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven," Discussion Papers 367, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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