Dual income taxes : a Nordic tax system

During the early 1990s the Nordic countries undertook a series of sweeping tax reforms. These reforms combined ambitious base-broadening measures with the introduction of the so-called dual income tax which systematically separates the taxation of labour income from the taxation of capital income. In recent years elements of dual income taxation have been introduced in several OECD countries (see Eggert and Genser, 2005), and variants of the dual income tax have been proposed for countries like Germany (Spengel and Wiegard, 2004, Sinn, 2007), Switzerland (Keuschnigg and Dietz, 2007) and the United Kingdom (Griffith, Hines and Sørensen, 2008). This paper discusses the principles and practices of dual income taxation in the Nordic countries. The first part of the paper explains the rationale and the historical background for the introduction of the dual income tax and describes the current Nordic tax practices. The second part of the paper focuses on the problems of taxing income from small businesses and the issue of corporate-personal tax integration under the dual income tax, considering alternative ways of dealing with these challenges. In the third and final part of the paper, I briefly discuss whether introducing a dual income tax could be relevant for New Zealand.