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

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Author Info

  • Pirttilä, Jukka

    ()
    (Labour Institute for Economic Research)

  • Selin, Håkan

    ()
    (Department of Economics)

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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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:26.

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Length: 40 pages
Date of creation: 09 Nov 2006
Date of revision:
Handle: RePEc:hhs:uunewp:2006_026

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Taxable income; income shifting; dual tax system;

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References

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  1. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc.
  2. Erik Fj�rli, 2004. "Tax Reform and the Demand for Debt," International Tax and Public Finance, Springer, vol. 11(4), pages 435-467, 08.
  3. 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.
  4. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November.
  5. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, vol. 55(2), pages 279-306, October.
  6. Hansson, Åsa, 2004. "Taxpayers Responsiveness to Tax Rate Changes and Implications for the Cost of Taxation," Working Papers 2004:5, Lund University, Department of Economics.
  7. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Erik Fjaerli & Diderik Lund, 2001. "The choice between owner's wages and dividends under the dual income tax," Finnish Economic Papers, Finnish Economic Association, vol. 14(2), pages 104-119, Autumn.
  11. Robert A Moffitt & Mark Wilhelm, 2000. "Taxation and the Labor Supply - Decisions of the Affluent," Economics Working Paper Archive 414, The Johns Hopkins University,Department of Economics.
  12. Giertz, Seth, 2006. "The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis," MPRA Paper 17603, University Library of Munich, Germany.
  13. Robin Boadway, 2004. "The Dual Income Tax System - An Overview," 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 03-08, October.
  14. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
  15. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November.
  16. Tobias Lindhe & Jan Södersten & Ann �berg, 2004. "Economic Effects of Taxing Different Organizational Forms under the Nordic Dual Income Tax," International Tax and Public Finance, Springer, vol. 11(4), pages 469-485, 08.
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Cited by:
  1. Annette Alstadsæter & Erik Fjærli, 2009. "Neutral taxation of shareholder income? Corporate responses to an announced dividend tax," International Tax and Public Finance, Springer, vol. 16(4), pages 571-604, August.
  2. Annette Alstadsæter, 2006. "The Achilles Heel of the Dual Income Tax. The Norwegian Case," Discussion Papers 474, Research Department of Statistics Norway.
  3. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  4. Peter A. Diamond, 2009. "Taxes and Pensions," CESifo Working Paper Series 2636, CESifo Group Munich.
  5. Thor O. Thoresen & Annette Alstadsæter, 2010. "Shifts in Organizational Form under a Dual Income Tax System," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 66(4), pages 384-418, December.
  6. Annette Alstadsæter & Knut Reidar Wangen, 2008. "Corporations’ Choice of Tax Regime when Transition Costs are Small and Income Shifting Potential is Large," CESifo Working Paper Series 2392, CESifo Group Munich.

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