Dual Income Taxation: Implementation and Experience in European Countries

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Dual Income Taxation Implementation and
Experience in European Countries

• Bernd Genser (University of Konstanz)
• Abstract
• Although the Nordic Dual Income Tax (DIT) has
  not been adopted by other European states,
  subsequent tax reforms (e.g., in Austria,
  Belgium, Italy, Greece, and the Netherlands)
  indicate a move towards schedular income
  taxation. Revealed preference to leave the
  traditional Schanz/Haig/Simons standard makes DIT
  a promising blueprint for the EU and a stepping
  stone for efficiency enhancing business tax
  reforms in Europe.

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Dual Income Taxation Implementation and
Experience in European Countries

• Bernd Genser
• (University of Konstanz)
• EPRU, 2005

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Dual Income Taxation

• The pros and cons of the comprehensive income
  tax
• The case for a dual income tax (DIT)
• The implementation of DIT in European countries
• Problems of DIT
• Concluding remarks

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The pros and cons of the comprehensive income tax

• Comprehensive income (Schanz/Haig/Simons
• standard) is acknowledged as the best
• economic indicator of ability-to-pay
• comprehensive income can be transformed into
  consumption and consumer welfare
• all forms of income are treated alike
• horizontal equity
• vertical equity

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Problems of comprehensive income taxation

• Violation of horizontal equity
• tax burden on the same present value of lifetime
  income depends on consumption pattern
• CIT favours human capital accumulation and
  discriminates against real capital accumulation

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Problems of comprehensive income taxation

• Proper calculation of comprehensive income
• assessment of capital gains (taxation upon
  realization rather than accrual)
• separation of nominal and real returns (taxation
  of nominal returns instead of proper inflation
  adjustment)

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Problems of comprehensive income taxation

• Tax preferences (tax base erosion)
• retained corporate profits
• (deferred) expenditure taxation of state pensions
• exemption of pension funds
• exemption of life insurance savings
• exemption of returns on owner-occupied housing

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The case for a dual income tax (DIT)

• Basic features of a dual income tax
• separation of income into- capital income-
  earned income (labour income)
• flat tax rate on capital income
• progressive tax schedule for earned income
• schedular income tax (rather than comprehensive
  income tax)

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Why is the DIT attractive?

• neutrality (level playing field)
• low proportional income tax on all capital
  income eliminates incentives towards investment
  in low taxed assets
• mitigation of inflationreal capital losses due
  to taxation of nominal returns become less likely
• protection against capital flightlow capital tax
  rates reduce incentive for international tax
  arbitrage

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Why is the DIT attractive?

• stimulation of savingslow tax on interest
  reduces present value of future consumer prices
  and incentive for debt financing of current
  consumption
• collection costsproportional capital income tax
  can be raised as a final withholding tax
• tax equityclosing tax loopholes reduces
  after-tax income disparity

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Table 1 The Nordic DIT (2004 tax rates in )
Source BMF (2003), BMF (2005)
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Table 2 Final Withholding Taxes on Capital Income
(2004 rates in )
Source BMF (2003), BMF (2005)
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Table 3 Special Tax Regimes on Capital Income
(2004 rates in )
Source BMF (2003), BMF (2005)
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Problems of DIT

• separation of capital and labour income for
  non-incorporated business
• separation of capital and labour income for small
  corporations with active owners
• political acceptance
• discrimination of future consumption

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Concluding remarks

• DIT is not an optimal income tax!
• DIT mitigates economic problems of the
  comprehensive income tax
• DIT creates efficiency gains

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Concluding remarks

• DIT-type schedular income taxation has got
  political support in EU countries
• DIT allows for a gradual shift from comprehensive
  income taxation (uniform tax on capital and
  earned income) to personal expenditure taxation
  (zero tax on normal capital returns)

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References

• Boadway, R. (2004), The Dual income Tax System,
  An Overview, CESifo DICE Report 2 (3), 3-8.
• Bundesministerium der Finanzen (2005), Die
  wichtigsten Steuern im internationalen Vergleich,
  Monatsberichte des BMF, 37-53.
• Cnossen, S. (2004), Reform and Coordination of
  Corporation Taxes in the EU An Alternative
  Agenda, Bulletin for International Fiscal
  Documentation 58, 134-150.
• Eggert, W. and Genser, B. (2005), Dual Income
  Taxation in EU Member Countries, CESifo DICE
  Report 1 (4), 41-47.

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References

• Keuschnigg, C. and Dietz, M. (2004), A Swiss
  Dual Income Tax. For More Neutrality in Company
  Taxation, University of St. Gallen.
• Sørensen, P. B. (ed.) (1998), Recent Innovations
  in Nordic Tax Policy From Global Income Tax to
  the Dual Income Tax, in P. B. Sørensen (ed.), Tax
  Policy in the Nordic Countries, (London
  Macmillan).
• Spengel, C. and Wiegard, W. (2004), Dual Income
  Tax A Pragmatic Reform Alternative for Germany,
  CESifo Dice Report 2 (3), 15-22.