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Designing Net Asset-Based Income-Splitting Rules under Dual Income Tax

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  • Kari S.

    (VATT Institute for Economic Research, PO Box 1279, 00101 Helsinki, Finland)

  • Ropponen O.

    (Etla Institute for Economic Research Helsinki, Finland)

Abstract

This article revisits the income-splitting regulations within the Nordic dual income tax framework. These regulations were introduced to counteract the inclination to transfer income between labor and capital income tax bases. They involve imputing a return on equity, considered as capital income, and taxing the residual portion at rates similar to those imposed on labor income. There are primarily two methods for computing imputed capital income. One method involves imputing a return based on the shares’ acquisition price (implemented in Sweden and Norway), while the other calculates a return using the net book assets of the company (utilized in Finland). This study examines the economic implications of the net asset-based splitting approach, an area not extensively explored in earlier literature. Our findings suggest that with appropriate selection of tax-parameter values, the net asset-based splitting system embodies the fundamental characteristics of a neutral corporate tax system akin to the ACE corporation tax. Consequently, our analysis indicates that the issues regarding incentive concerns in the Finnish taxation of closely held companies, highlighted in previous studies, stem more from erroneous parameter values rather than flawed underlying principles.

Suggested Citation

  • Kari S. & Ropponen O., 2024. "Designing Net Asset-Based Income-Splitting Rules under Dual Income Tax," Nordic Tax Journal, Sciendo, vol. 2024(s1), pages 25-43.
    • Handle: RePEc:vrs:notajo:v:2024:y:2024:i:s1:p:25-43:n:1003
    DOI: 10.2478/ntaxj-2024-0005
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    References listed on IDEAS

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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