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The inequality effects of a dual income tax system

The overall inequality effects of a dual income tax (DIT) system, combining progressive taxation of labor income with proportional taxation of income from capital, are investigated. Simple examples show that correlations between distributions of wage and capital income, the degree of tax rate differentiation in the DIT, and reranking of tax-payers can be expected to complicate the analysis. We trace out what can be said definitively, obtaining sufficient conditions for unambiguous inequality reduction and identifying the nature of the implicit redistribution between labor and capital income which is involved, with the help of Norwegian income tax data.

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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 663.

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Date of creation: Sep 2011
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Handle: RePEc:ssb:dispap:663
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  1. Erlend E. Bø & Peter J. Lambert & Thor O. Thoresen, 2011. "Horizontal inequity under a dual income tax system: principles and measurement," Discussion Papers 647, Research Department of Statistics Norway.
  2. Pfahler, Wilhelm, 1990. "Redistributive Effect of Income Taxation: Decomposing Tax Base and Tax Rates Effects," Bulletin of Economic Research, Wiley Blackwell, vol. 42(2), pages 121-29, April.
  3. Bernd Genser & Andreas Reutter, 2007. "Moving Towards Dual Income Taxation in Europe," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0717, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  4. Shorrocks, Anthony F, 1983. "The Impact of Income Components on the Distribution of Family Incomes," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 311-26, May.
  5. Rietveld, Piet, 1990. "Multidimensional inequality comparisons : On aggravation and mitigation of inequalities," Economics Letters, Elsevier, vol. 32(2), pages 187-192, February.
  6. Valentino Dardanoni & Peter Lambert, 1998. "Horizontal inequity comparisons," IFS Working Papers W98/07, Institute for Fiscal Studies.
  7. Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January.
  8. Thor O. Thoresen & Annette Alstadsæter, 2008. "Shifts in organizational form under a dual income tax system," Discussion Papers 529, Research Department of Statistics Norway.
  9. Fellman, J, 1976. "The Effect of Transformations on Lorenz Curves," Econometrica, Econometric Society, vol. 44(4), pages 823-24, July.
  10. Jakobsson, Ulf, 1976. "On the measurement of the degree of progression," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 161-168.
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