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Allocating Business Income between Capital and Labor under a Dual Income Tax

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  • Thornton Matheson
  • Pall Kollbeins
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    Abstract

    In contrast to most Scandinavian countries, Iceland allocates the income of closely held businesses (CHBs) between capital and labor based on administratively set minimum wages rather than an imputed return to book assets. This paper contrasts the relative tax burdens of the current minimum wage system with asset-based allocation methods, and finds that switching to an asset-based method could increase tax revenues from CHBs in a generally progressive manner. Predictably, the shift would also raise the tax burden of skilled labor-intensive industries more than it would that of capital-intensive industries.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/263.

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    Length: 27
    Date of creation: 01 Nov 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/263

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    Related research

    Keywords: Income taxes; Iceland; Corporate taxes; Capital; Labor; Taxation; wage; wages; labor income; minimum wage; tax rate; minimum wages; salaries; tax rates; tax purposes; bond rate; contribution rate; pension; wage freeze; labor inputs; salary; wage levels; nominal wage; tax treatment; nominal wages; wage increases; pension schemes; tax advantage;

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