Tax Reform in Open Economies
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Tax Reform in Open Economies

International and Country Perspectives

Edited by Iris Claus, Norman Gemmell, Michelle Harding and David White

The eminent contributors (including Altshuler, Creedy, Freebairn, Gravelle, Heady, Kalb, Sørensen and Zodrow) investigate the beneficial directions for medium-term tax reform in the light of global developments and lessons from the latest taxation research. In addressing this issue, they review recent advances in both the theoretical and empirical tax literature and reform evidence from individual countries. Topics covered include the impact of taxes on economic performance; international and corporate taxation; personal tax and welfare systems; environmental taxation; and country-specific tax reform experiences.
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Chapter 5: Dual Income Taxes: A Nordic Tax System

Peter Birch Sørensen


Peter Birch Sørensen PRINCIPLES OF DUAL INCOME TAXATION What is a Dual Income Tax? 5.1 5.1.1 The Nordic dual income tax (henceforth termed the DIT) is a particular form of schedular income tax which combines progressive taxation of labour and transfer income with a low flat tax on all capital income. In the pure version of the system the flat tax rate on capital income is aligned with the corporate income tax rate and with the marginal tax rate on labour income in the first bracket. In this case the DIT may be described as a system that combines a flat tax on total income with a progressive surtax on labour and transfer income. An important part of the philosophy underlying the DIT is that the capital income tax base should be broad, to ensure the greatest possible degree of tax neutrality. Under a consistent DIT, the personal capital income tax base would thus include the following components: ● ● ● ● ● ● ● interest dividends capital gains rental income royalties imputed returns on owner-occupied housing imputed returns on capital invested in non-corporate firms In case the sum of these components is negative, the taxpayer is entitled to a tax credit equal to the capital income tax rate times the negative balance. The quest for tax neutrality was well reflected in the Norwegian DIT introduced in 1992 which aimed to tax all capital income once but only once. Hence the Norwegian tax reform involved full alleviation of the 78 Dual income taxes 79 double taxation...

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