Taxing dividends in a dual income tax system - The Nordic experience with the income splitting rules

Håkan Selin

No 2024:20, Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: In a dual income tax (DIT) system, labor income is taxed progressively, while capital income is subject to a lower proportional tax. DIT systems were introduced in Sweden, Norway, and Finland in the early 1990s. In the absence of rules restricting capital income distributions, owners of closelyheld corporations would easily be able to circumvent the progressive tax on earned income by withdrawing an appropriate amount of dividends instead of wages. The Nordic countries adopted very different income splitting models, with immediate implications for the tax treatment of dividends. In this article I first review the principles of the income splitting rules of Sweden, Norway, and Finland. I then discuss some of the tradeoffs involved in the design of such rules.

Keywords: Income taxation; Nordic comparison; dividend taxation (search for similar items in EconPapers)
JEL-codes: G35 H32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-11-18
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Working Paper: Taxing Dividends in a Dual Income Tax System - The Nordic Experience with the Income Splitting Rules (2024)
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