How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993

35 Pages Posted: 12 Jan 2007

See all articles by Jukka Pirttila

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER); Tampere University of Technology

Hakan Selin

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2006

Abstract

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.

Keywords: taxable income, income shifting, dual tax system

JEL Classification: C21, H21, H31

Suggested Citation

Pirttila, Jukka and Selin, Hakan, How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993 (December 2006). CESifo Working Paper Series No. 1875. Available at SSRN: https://ssrn.com/abstract=956267

Jukka Pirttila (Contact Author)

United Nations - World Institute for Development Economics Research (UNU/WIDER) ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

Hakan Selin

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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