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Dual Income Tax: Why and How?

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  • Peter Birch Sørensen

Abstract

The dual income tax combines a progressive tax schedule for labor 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 the labor-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, 2006. "Dual Income Tax: Why and How?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(4), pages 559-586, February.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200602)61:4_559:ditwah_2.0.tx_2-a
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    References listed on IDEAS

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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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