From the Global Income Tax To the Dual Income Tax: Recent Tax Reforms in The Nordic Countries

Peter Birch Soerensen

No 93-07, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: The paper discusses the recent drive towards a system of "dual" income taxation (DIT) in the Nordic countries. The pure version of this system combines progressive taxation of labour and transfer incomes with a proportional tax on income from capital at a level equal to the corporate income tax rate. The paper considers the motives for the introduction of this new income tax system, ranging from rather abstract theoretical arguments to very pragmatic practical considerations. While the Nordic DIT system violates the principles of the conventional personal income tax, it is argued that it may in fact be more in line with the philosophy of a true Haig-Simons comprehensive income tax. It is also suggested that the DIT system may cause fewer distortions to ressource allocation than the conventional income tax. On the debit side, the paper points out several practical problems of taxing income from small enterprises under the differentiated income tax.

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