How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993
Bank of Finland; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
CESifo Working Paper Series No. 1875
Dual income tax systems have become increasingly popular; yet, relatively little is known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.
Number of Pages in PDF File: 35
Keywords: taxable income, income shifting, dual tax system
JEL Classification: C21, H21, H31working papers series
Date posted: January 12, 2007
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