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The dual income tax system levies a proportional tax rate on all net income (capital, wage and pension income less deductions) combined with progressive tax rates on gross labour and pension income. This implies that labour income is taxed at higher rates than capital income, and that the value of the tax allowances is independent of the income level. The dual income tax system deliberately moves away from from the comprehensive income tax system which taxes all or most (cash) income less deductions (net income) according to the same rate schedule. The dual income tax was first implemented in the four Nordic countries (Denmark, Finland, Norway and Sweden) through a number of tax reforms from 1987 to 1993. The dual income tax is therefore also known as the Nordic tax system or the Nordic Dual Income Tax.

History

The dual income tax was first proposed by the danish economist Niels Christian Nielsen in 1980. He suggested that the comprehensive income tax should be replaced by a system involving a flat rate of tax on capital income - at the level of the corporate income tax rate - combined with progressive taxation of the taxpayer's total income from other sources.

The proposal was taken up by a committee appointed by the Savings Bank Association (Sparekasseforeningen) that in the early 1980s prepared a discussion paper for a tax reform. Niels Christian Knudsen, now the president of the Savings Banks Association, contacted in June 1984 the Minister of Finance Isi Foighel and made him aware of the committee's proposel. The discussion paper was subsequently to serve as the basis for the tax ministers negotiations with the opposition on a tax reform.

The danish minority government did propose a dual income tax in the spring of 1985, but the opposition was reluctant to give up the idea of progressive taxation of capital income. The final tax reform of 1987 included some amount of progressive taxation of capital income, but the top marginal tax rate on capital income (56 percent) was less than the top marginal tax rate of labour income (68 percent). It was thus not a pure dual income tax that was introduced in Denmark in 1987, but the danish tax system moved considerably away from the comprehensive income tax.

Se also

• Taxation in Denmark
• Taxation in Finland
• Taxation in Norway
• Taxation in Sweden

References

Kallestrup, Morten (2003). "Dansk skattepolitik - politiske beslutningsprocesser og tvivlsomme kausalforståelser". Samfundsøkonomen (in Danish). 2003 (6).

Eggert, Wolfgang; Genser, Bernd (2005). "Dual Income Taxation in EU Member Countries" (PDF). CESifo DICE Report. 3 (1).

Sørensen, Peter Birch (1994). "From the global income tax to the dual income tax: Recent tax reforms in the Nordic countries". International Tax and Public Finance. 1 (1): 57–79.

Further reading

Alstadsæter, Annette (2007). "The Achilles Heel of the Dual Incom Tax: The Norwegian Case" (PDF). Finnish Economic Papers. 20 (1): 5–22.

Kleinbard, Edward D. (2010). "An American Dual Income Tax: Nordic Precedents" (PDF). Northwestern Journal of Law and Social Policy. 5 (1): 41–86.

Nielsen, Søren Bo; Sørensen, Peter Birch (1997). "On the optimality of the Nordic system of dual income taxation". Journal of Public Economics. 63 (3). Elsevier: 311–329. doi:10.1016/S0047-2727(96)01597-6.

van den Noord, Paul (2000). "The Tax System in Norway. Past Reforms and Future Challenges". OECD Economics Department Working Papers. 244. OECD Publisging.

OECD, ed. (2006). Fundamental Reform of Personal Income Tax. OECD Tax Policy Studies. Vol. 13. OECD Publishing. doi:10.1787/19900538. ISBN 9789264025783.

Pirttilä, Jukka; Selin, Håkan (2006). "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993" (PDF). Working Paper 2006:26. 2006 (26). Uppsala University - Department of Economics.

Sørensen, Peter Birch (2005). "Dual Income Taxation: Why and How?". FinanzArchiv: Public Finance Analysis. 61 (4): 559–586. doi:10.1628/001522105776072780.

Sørensen, Peter Birch (2009). "Dual Income Taxes: A Nordic Tax System" (PDF). Paper presented at «New Zealand Tax Reform - Where to Next?» 11-13 February 2009.