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The Nordic model: 25 years of drawing the line between earned and capital income in Finland

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  • Knuutinen Reijo

    (Turku School of Economics at the University of Turku, Turku, Finland)

Abstract

In personal income taxation, Finland had used the dualistic income tax model, known as the Nordic model, since 1993. The basic idea is that taxation of earned income is progressive, whereas taxation of capital income is proportional. Here, the model is reviewed from different perspectives: What kind of tax policy background does it have and how is the distinction between types of income argued for on theoretical grounds? How has the borderline of earned and capital income been drawn in tax legislation, and how is it drawn in the court cases, in particular in those related to tax avoidance? The dualistic model has often been criticized using equity arguments, but there are still strong arguments for the model. In any case, the model has not always worked too well in practice. The distinction has required special tax legislation as well as given rise to many court cases.

Suggested Citation

  • Knuutinen Reijo, 2018. "The Nordic model: 25 years of drawing the line between earned and capital income in Finland," Nordic Tax Journal, Sciendo, vol. 2018(1), pages 64-80, January.
    • Handle: RePEc:vrs:notajo:v:2018:y:2018:i:1:p:64-80:n:3
    DOI: 10.1515/ntaxj-2018-0003
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    References listed on IDEAS

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    1. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47(3), pages 379-379.
    2. Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-178, March.
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