A Growth-Oriented Dual Income Tax

57 Pages Posted: 9 Aug 2005

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Martin D. Dietz

University of St. Gallen - Institute of Public Finance and Fiscal Law

Date Written: July 2005

Abstract

This paper proposes a growth-oriented dual-income tax by combining an allowance for corporate equity with a broadly defined flat tax on personal capital income. Revenue losses are compensated by an increase in the value added tax. The paper demonstrates the neutrality properties of the reform with respect to investment, firm financial decisions and organizational choice. Tax rates are chosen to prevent income shifting from labor to capital income. The reform decisively strengthens investment of domestically owned firms as well as home and foreign based multinationals and boosts savings. Simulations with a calibrated growth model for Switzerland indicate that the reform could add between 2 to 3 percent of GDP in the long run, depending on the specific scenario. Given the slow nature of capital accumulation, it also imposes considerable costs in the short run. We also consider a tax smoothing scenario to offset the intergenerationally redistributive effects.

Keywords: tax reform, investment, financial structure, growth

JEL Classification: D58, D92, E62, G32, H25

Suggested Citation

Keuschnigg, Christian and Dietz, Martin D., A Growth-Oriented Dual Income Tax (July 2005). CESifo Working Paper Series No. 1513. Available at SSRN: https://ssrn.com/abstract=775604

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin D. Dietz

University of St. Gallen - Institute of Public Finance and Fiscal Law ( email )

Varnbuelstrasse 19
St. Gallen, CH-9000
Switzerland
+41 71 224 3086 (Phone)
+41 71 224 2670 (Fax)

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