Taxing Capital Income in the Nordic Countries: A Model for the European Union?

Sijbren Cnossen

FinanzArchiv: Public Finance Analysis, 1999, vol. 56, issue 1, 18-50

Abstract: High progressive tax rates on capital income induce tax arbitrage between income items and across borders. To reduce such tax arbitrage, the Nordic countries, most notable Finland and Norway, have introduced dual income taxes (DITs). Under the DIT, all capital income, including corporate profits, is taxed at a uniform, proportional rate. By contrast, labor income is taxed at higher, progressive rates. The DIT could serve as the model for taxing capital income in the member states of the European Union, particularly if agreement is reached on the comprehensive application of the source entitlement principle. This would move the DIT in the direction of the comprehensive business income tax (CBIT), proposed by U.S. Treasury. Under CBIT, all earnings on equity as well as debt are taxed at the company level and exempt at the level of the recipients. Wider adoption of the DIT would meet EU neutrality and subsidiarity requirements, as well as enhance the administrative reach of capital income taxes.

Date: 1999
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