Dual income tax
Encyclopedia
The dual income tax system levies a proportional tax
rate on all net income (capital, wage and pension income less deductions) combined with progressive tax
rates on gross labour and pension income. This implies that labour income is taxed at higher rates than capital income, and that the value of the tax allowances is independent of the income level. The dual income tax system deliberately moves away from from the comprehensive income tax (global income tax) system which taxes all or most (cash) income less deductions (net income) according to the same rate schedule. The dual income tax was first implemented in the four Nordic countries (Denmark
, Finland
, Norway
and Sweden
) through a number of tax reforms from 1987 to 1993. The dual income tax is therefore also known as the Nordic tax system or the Nordic Dual Income Tax.
The proposal was taken up by a committee appointed by the Savings Bank Association (Sparekasseforeningen) that in the early 1980s prepared a discussion paper for a tax reform. Niels Christian Knudsen, now the president of the Savings Banks Association, contacted in June 1984 the Minister of Finance Isi Foighel and made him aware of the committee's proposel. The discussion paper was subsequently to serve as the basis for the tax ministers negotiations with the opposition on a tax reform.
The danish minority government did propose a dual income tax in the spring of 1985, but the opposition was reluctant to give up the idea of progressive taxation of capital income. The final tax reform of 1987 included some amount of progressive taxation of capital income, but the top marginal tax rate on capital income (56 percent) was less than the top marginal tax rate of labour income (68 percent). It was thus not a pure dual income tax that was introduced in Denmark in 1987, but the danish tax system moved considerably away from the comprehensive income tax.
Proportional tax
A proportional tax is a tax imposed so that the tax rate is fixed. The amount of the tax is in proportion to the amount subject to taxation. "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent , where the marginal tax rate is...
rate on all net income (capital, wage and pension income less deductions) combined with progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
rates on gross labour and pension income. This implies that labour income is taxed at higher rates than capital income, and that the value of the tax allowances is independent of the income level. The dual income tax system deliberately moves away from from the comprehensive income tax (global income tax) system which taxes all or most (cash) income less deductions (net income) according to the same rate schedule. The dual income tax was first implemented in the four Nordic countries (Denmark
Denmark
Denmark is a Scandinavian country in Northern Europe. The countries of Denmark and Greenland, as well as the Faroe Islands, constitute the Kingdom of Denmark . It is the southernmost of the Nordic countries, southwest of Sweden and south of Norway, and bordered to the south by Germany. Denmark...
, Finland
Finland
Finland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
and Sweden
Sweden
Sweden , officially the Kingdom of Sweden , is a Nordic country on the Scandinavian Peninsula in Northern Europe. Sweden borders with Norway and Finland and is connected to Denmark by a bridge-tunnel across the Öresund....
) through a number of tax reforms from 1987 to 1993. The dual income tax is therefore also known as the Nordic tax system or the Nordic Dual Income Tax.
History
The dual income tax was first proposed by the danish economist Niels Christian Nielsen in 1980. He suggested that the comprehensive income tax should be replaced by a system involving a flat rate of tax on capital income - at the level of the corporate income tax rate - combined with progressive taxation of the taxpayer's total income from other sources.The proposal was taken up by a committee appointed by the Savings Bank Association (Sparekasseforeningen) that in the early 1980s prepared a discussion paper for a tax reform. Niels Christian Knudsen, now the president of the Savings Banks Association, contacted in June 1984 the Minister of Finance Isi Foighel and made him aware of the committee's proposel. The discussion paper was subsequently to serve as the basis for the tax ministers negotiations with the opposition on a tax reform.
The danish minority government did propose a dual income tax in the spring of 1985, but the opposition was reluctant to give up the idea of progressive taxation of capital income. The final tax reform of 1987 included some amount of progressive taxation of capital income, but the top marginal tax rate on capital income (56 percent) was less than the top marginal tax rate of labour income (68 percent). It was thus not a pure dual income tax that was introduced in Denmark in 1987, but the danish tax system moved considerably away from the comprehensive income tax.
Se also
- Taxation in DenmarkTaxation in DenmarkThe Danish income tax was introduced in 1903 and is now divided into government tax and local tax. The state tax is a progressive tax while the local tax is a flat tax.All income from employment or self-employment is levied a tax of 8% before income tax...
- Taxation in FinlandTaxation in FinlandTaxation in Finland is carried out by the State of Finland, mainly through Finnish Tax Administration, an agency of Ministry of Finance. Finnish Customs , Finnish Transport Agency and Finnish Transport Safety Agency also collect taxes...
- Taxation in NorwayTaxation in NorwayTaxation in Norway is levied by the central government, the county municipality and the municipality . The tax level in Norway is among the highest in the world. In 2009 the total tax revenue was 41.0 % of the gross domestic product . Many direct and indirect taxes exist. The most important...
- Taxation in SwedenTaxation in Sweden- Salary incomes :Taxation in Sweden on salaries for an employee involves contributing to three different levels of government: the municipality, the county council, and the central government...