Dual Income Taxation and Top Income Shares

Michele Ceraolo, Roberto Iacono and Fernando Rios-Avila

No 12642, CESifo Working Paper Series from CESifo

Abstract: This paper investigates the distributional consequences of Dual Income Taxation (DIT), a system that taxes labour income progressively while applying a flat rate to capital income. We make two complementary contributions. First, we classify income tax systems across 20 advanced economies from 1980 to 2019. Our country-by-country analysis reveals substantial heterogeneity in DIT regimes, and establishes a three-group taxonomy distinguishing full DIT systems, comprehensive income tax systems, and mixed regimes. Second, we conduct the first multi-country causal analysis of DIT's effects on income concentration using difference-in-differences methods that account for staggered treatment timing. We employ a 'relaxed' framework covering 15 countries that introduced flat capital income taxation and a 'strict' framework covering 8 countries that transitioned cleanly from comprehensive to dual taxation. The relaxed framework yields robust evidence that DIT adoption is associated with statistically significant increases in income concentration: the top 10% income share rises by 0.67 percentage points and the top 1% share by 0.50 percentage points. Effects materialise immediately after reform, consistent with income shifting and capital reallocation, and tend to plateau over the medium term. The strict framework produces ambiguous results owing to limited sample size and high sensitivity to methodological choices. Our findings document a measurable equity cost of DIT that policymakers should weigh against its efficiency gains.

Keywords: dual income taxation; income inequality; nordic countries; tax policy (search for similar items in EconPapers)
JEL-codes: D63 H23 H24 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-pbe
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