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Dual Income Taxation: Why and How?

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  • Peter Birch Sørensen

    (Department of Economics, University of Denmark)

Abstract

The dual income tax combines a progressive tax schedule for labour income with a low flat tax rate on capital income and corporate income. This paper restates the case for the dual income tax and discusses alternative methods of taxing business income under such a tax system, paying special attention to the taxation of income from closely held corporations. It is argued that the imputed normal return to shares in unlisted companies should be taxed as capital income, while above-normal returns should be subject to labour income tax. The paper demonstrates that such a tax scheme can be designed to be neutral towards the firm’s investment and financing decisions and towards the decisions of shareholders to realize their shares.

Suggested Citation

  • Peter Birch Sørensen, 2005. "Dual Income Taxation: Why and How?," EPRU Working Paper Series 05-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:epruwp:05-10
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    File URL: http://web.econ.ku.dk/epru/files/wp/wp-05-10.pdf
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    References listed on IDEAS

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    17. Mikael Apel & Jan Södersten, 1999. "Personal Taxation and Investment Incentives in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(1), pages 79-88, February.
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    21. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
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    Cited by:

    1. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 2008 - 2015 264, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. repec:prg:jnlcfu:v:2021:y:2021:i:4:id:566 is not listed on IDEAS
    3. Savina Finardi & Anna Melicharová, 2021. "Impact of Svarc system on Tax Revenues in the Czech Republic [Dopad švarcsystému na daňové příjmy v České repubice]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2021(4), pages 19-29.
    4. Mario Mansour, 2015. "Tax Policy in MENA Countries: Looking Back and Forward," IMF Working Papers 2015/098, International Monetary Fund.
    5. Georg Gottholmseder & Heinz Handler, 2008. "Ziele und Optionen der Steuerreform: Reformoptionen für die Unternehmensbesteuerung," WIFO Studies, WIFO, number 33943.

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    More about this item

    Keywords

    dual income tax; tax neutrality; taxation of business income; shareholder income tax;
    All these keywords.

    JEL classification:

    • 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

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