IDEAS home Printed from https://ideas.repec.org/p/kud/epruwp/05-10.html
   My bibliography  Save this paper

Dual Income Taxation: Why and How?

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://web.econ.ku.dk/epru/files/wp/wp-05-10.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christian Keuschnigg & Martin Dietz, 2007. "A growth oriented dual income tax," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(2), pages 191-221, April.
    2. Gordon, Roger H & Bovenberg, A Lans, 1996. "Why Is Capital So Immobile Internationally? Possible Explanations and Implications for Capital Income Taxation," American Economic Review, American Economic Association, vol. 86(5), pages 1057-1075, December.
    3. repec:ces:ifodic:v:3:y:2005:i:1:p:14567534 is not listed on IDEAS
    4. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    5. Boadway, Robin & Bruce, Neil, 1992. "Problems with integrating corporate and personal income taxes in an open economy," Journal of Public Economics, Elsevier, vol. 48(1), pages 39-66, June.
    6. Christoph Spengel & Wolfgang Wiegard, 2004. "Dual Income Tax: A Pragmatic Tax Reform Alternative for Germany," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(3), pages 15-22, October.
    7. 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.
    8. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    9. Krister Andersson & Vesa Kanniainen & Jan Södersten & Peter Birch Sørensen, 1998. "Corporate Tax Policy in the Nordic Countries," Palgrave Macmillan Books, in: Peter Birch Sørensen (ed.), Tax Policy in the Nordic Countries, chapter 3, pages 72-137, Palgrave Macmillan.
    10. Chamley, Christophe, 2001. "Capital income taxation, wealth distribution and borrowing constraints," Journal of Public Economics, Elsevier, vol. 79(1), pages 55-69, January.
    11. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    12. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 21(1), pages 21-30.
    13. Wolfgang Eggert & Bernd Genser, 2005. "Dual Income Taxation in EU Member Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(1), pages 41-47, 04.
    14. Wolfgang Eggert & Bernd Genser, 2005. "Dual Income Taxation in EU Member Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 3(01), pages 41-47, April.
    15. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
    16. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    17. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    18. Christoph Spengel & Wolfgang Wiegard, 2004. "Dual Income Tax: A Pragmatic Tax Reform Alternative for Germany," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 2(03), pages 15-22, October.
    19. repec:ces:ifodic:v:2:y:2004:i:3:p:14567752 is not listed on IDEAS
    20. 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.
    21. Clemens Fuest & Bernd Huber, 2001. "Can Corporate-personal Tax Integration Survive in Open Economies?. Lessons from the German Tax Reform," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 514-524, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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. 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.
    3. repec:prg:jnlcfu:v:2021:y:2021:i:4:id:566 is not listed on IDEAS
    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, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Peter Birch Sørensen, 2005. "Dual Income Taxation: Why and how?," CESifo Working Paper Series 1551, CESifo.
    2. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," EPRU Working Paper Series 06-06, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    3. Peter Birch Sørensen, 2006. "Can Capital Income Taxes Survive? And Should They?," CESifo Working Paper Series 1793, CESifo.
    4. Peter Birch Sørensen, 2006. "Dual Income Tax: Why and How?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(4), pages 559-586, February.
    5. Siemers, Lars-H. R. & Zöller, Daniel, 2011. "Change-over within little scope: On the decision neutrality of recent tax reform proposals," MPRA Paper 27943, University Library of Munich, Germany.
    6. Bernd Genser, 2006. "The Dual Income Tax: Implementation and Experience in European Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0625, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Bernd Genser & Andreas Reutter, 2007. "Moving Towards Dual Income Taxation in Europe," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(3), pages 436-456, September.
    8. Diamond, Peter, 2010. "Taxes and Pensions," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 59-74.
    9. 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.
    10. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    11. Aghion, Philippe & Akcigit, Ufuk & Fernández-Villaverde, Jesús, 2012. "Optimal Capital Versus Labor Taxation with Innovation-Led Growth," Scholarly Articles 27755236, Harvard University Department of Economics.
    12. Bas Jacobs & A. Bovenberg, 2010. "Human capital and optimal positive taxation of capital income," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(5), pages 451-478, October.
    13. Spencer Bastani & Daniel Waldenström, 2018. "How should capital be taxed? The Swedish experience," Working Papers hal-02878153, HAL.
    14. Waldenstrom, Daniel & Bastani, Spencer, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," CEPR Discussion Papers 12880, C.E.P.R. Discussion Papers.
    15. Sijbren Cnossen, 2018. "Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 808-840, June.
    16. Masaaki Suzuki, 2014. "Debates on Individual Income Tax and Potential Japanese Tax Reforms," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 10(3), pages 371-396, October.
    17. John W. Diamond & George R. Zodrow, 2006. "Economic Effects of a Personal Capital Income Tax Add-On to a Consumption Tax," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0629, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    18. Saez, Emmanuel, 2013. "Optimal progressive capital income taxes in the infinite horizon model," Journal of Public Economics, Elsevier, vol. 97(C), pages 61-74.
    19. Boadway, Robin, 2005. "Income tax reform for a globalized world: The case for a dual income tax," Journal of Asian Economics, Elsevier, vol. 16(6), pages 910-927, December.
    20. Jing Xing, 2011. "Does tax structure affect economic growth? Empirical evidence from OECD countries," Working Papers 1120, Oxford University Centre for Business Taxation.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kud:epruwp:05-10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Hoffmann (email available below). General contact details of provider: https://edirc.repec.org/data/epcbsdk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.