An American Dual Income Tax : Nordic Precedents

A classic dual income tax is a schedular income tax in which capital income (broadly defined, and including corporate income) is taxed at a relatively low flat rate and labor (and unspecified) income is taxed at higher progressive rates. The Nordic countries, in particular Norway, have pioneered the implementation of dual income tax principles in their fiscal systems. This article analyzes the Nordic experience with dual income taxes with a view to their potential utility for tax system design in the United States. The Article demonstrates that, on balance, implementable dual income taxes compare favorably with actual implementations of comprehensive income taxes across several important dimensions. Dual income taxes are administratively viable, although a dual income tax of the classic variety does require the adoption of a robust mechanism for separating labor from capital income when the two are factually conjoined. Dual income taxes compare favorably with comprehensive income tax systems on economic efficiency grounds, and achieve those gains with relatively little redistributive effect (mainly due to the great difficulty of taxing capital income in comprehensive tax systems in the first place). Moreover, unlike more ambitious reform proposals, a dual income tax could be implemented in the immediate future. Finally, a dual income tax is an effective strategic response to the problems that otherwise would plague the U.S. tax system if, as appears likely, the United States materially lowers its corporate income tax rate and allows the maximum individual income tax bracket to rise. In the absence of some strategic response, this rate differential would lead to a phenomenon not seen for at least a generation: the rise of the taxable (“C”) corporation as a tax shelter