Skip to main content
SpringerLink
Log in

A growth oriented dual income tax

  • Policy Watch
  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

This paper proposes a growth oriented dual income tax by combining an allowance for corporate equity with a broadly defined flat tax on personal capital income. Revenue losses are compensated by an increase in the value added tax. The paper demonstrates the neutrality properties of the reform with respect to investment, firm financial decisions and organizational choice. Tax rates are chosen to prevent income shifting from labor to capital income. The reform decisively strengthens investment of domestically owned firms as well as home and foreign based multinationals and boosts savings. Simulations with a calibrated growth model for Switzerland indicate that the reform could add between 4 to 5 percent of GNP in the long-run, depending on the specific scenario. Given the slow nature of capital accumulation, it imposes considerable costs in the short-run. We consider a tax smoothing scenario to offset the intergenerationally redistributive effects.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Auerbach, A. J. (1991). Retrospective capital gains taxation. American Economic Review, 81(1), 167–178.

    Google Scholar 

  • Auerbach, A. J. (2002). Taxation and corporate financial policy. In A. Auerbach and M. Feldstein (Eds.), Handbook of public economics III, chapter 19 (pp. 1251–1292). Amsterdam: North-Holland.

  • Auerbach, A. J., & Hassett, K. A. (2003). On the Marginal source of investment funds. Journal of Public Economics, 87(1), 205–232.

    Article  Google Scholar 

  • Bernheim, D. B. (2002). Taxation and saving. In A. Auerbach and M. Feldstein (Eds.), Handbook of public economics III, chapter 19 (pp. 1173–1249). Amsterdam: Elsevier.

  • Blanchard, O. J. (1985). Debt, deficits, and finite horizons. Journal of Political Economy, 93(2), 223–247.

    Article  Google Scholar 

  • Blundell, R. W., & MaCurdy, T. (1999). Labor supply: A review of alternative approaches. In O. C. Ashenfelter and D. Card (Eds.) Handbook of labor economics III A, chapter 27 (pp. 1559–1597). Amsterdam: Elsevier.

  • Boadway, R. (2004). The dual income tax aystem: An overview. CESifo Dice Report, 2(3), 3–8.

    Google Scholar 

  • Boadway, R., & Bruce, N. (1984). A general proposition on the design of a neutral business tax. Journal of Public Economics, 24(2), 231–239.

    Article  Google Scholar 

  • Bond, S., & Meghir, C. (1994). Dynamic investment models and the firm’s financial policy. Review of Economic Studies, 61(2), 197–222.

    Article  Google Scholar 

  • Bond, S. R., & Devereux, M. P. (2003). Generalised r-based and s-based taxes under uncertainty. Journal of Public Economics, 87(5–6), 1291–1311.

    Google Scholar 

  • Carroll, R., Hassett, K. A., & Mackie III, J. B. (2003). The effect of dividend tax relief on investment incentives. National Tax Journal, 56(3), 629–651.

    Google Scholar 

  • Chetty, R., & Saez, E. (2005). Dividend taxes and corporate behavior: Evidence from the 2003 dividend tax cut. Quarterly Journal of Economics, 120(3), 791–833.

    Article  Google Scholar 

  • Cnossen, S. (1999). Taxing capital income in the nordic countries: A model for the european union?. FinanzArchiv, 56(1), 18–50.

    Google Scholar 

  • Cullen, J. B., & Gordon, R. H. (2002). Taxes and entrepreneurial activity: Theory and evidence for the u.s. Working Paper.

  • de Mooij, R. A., & Ederveen, S. (2003). Taxation and foreign direct investment: A synthesis of empirical research. International Tax and Public Finance, 10(6), 673–693.

    Article  Google Scholar 

  • Devereux, M. P. (2000). Issues in the taxation of foreign portfolio and direct investment. In S. Cnossen (Ed.), Taxing capital income in the European union (pp. 110–134). Oxford: Oxford University Press.

  • Devereux, M. P. (2004). Some optimal tax rules for international portfolio and direct investment. Finanz Archiv, 60(1), 1–23.

    Google Scholar 

  • Devereux, M. P., & Griffith, R. (1998). Taxes and the location of production: Evidence from a panel of US multinationals. Journal of Public Economics, 68(3), 335–367.

    Article  Google Scholar 

  • Devereux, M. P., Griffith, R., & Klemm, A. (2002). Corporate income tax reforms and international tax competition. Economic Policy, 35, 449–495.

    Article  Google Scholar 

  • Dietz, M. D., & Keuschnigg, C. (2004). Corporate income tax reform in switzerland. Swiss Journal of Economics and Statistics, 140(4), 483–519.

    Google Scholar 

  • Dietz, M. D. (2003). Dividend and capital gains taxation in a cross-section of firms. IFF Working Paper 0306.

  • Erosa, A., & Gervais, M. (2002). Optimal taxation in life-cycle economies. Journal of Economic Theory, 105(2), 338–369.

    Article  Google Scholar 

  • European Commission (2001). Company taxation in the internal market. Commission Staff Working Paper COM (2001) 582 final.

  • Fjærli, E., & Lund, D. (2001). The choice between owner’s wages and dividends under the dual income tax. Finnish Economic Papers, 14(2), 104–119.

    Google Scholar 

  • French, K. R., & Poterba, J. M. (1991). Investor diversification and international equity markets. American Economic Review, Papers and Proceedings, 81(2), 222–226.

    Google Scholar 

  • Fuchs, V. R., Krueger, A. B., & Poterba, J. M. (1998). Economists’ views about parameters, values, and policies: Survey results in labor and public economics. Journal of Economic Literature, 36(3), 1387–1425.

    Google Scholar 

  • Fuest, C., Huber, B., & Nielsen, S. B. (2003). Why is the corporate tax lower than the personal tax rate? the role of new firms. Journal of Public Economics, 87(1), 157–174.

    Article  Google Scholar 

  • Gordon, R. H. (1986). Taxation of investment and savings in a world economy. American Economic Review, 76(5), 1086–1102.

    Google Scholar 

  • Gordon, R. H. (2000). Taxation of capital income vs. labour income: An overview. In S. Cnossen (Ed.), Taxing capital income in the European union (pp. 15–45). Oxford: Oxford University Press.

  • Gordon, R. H., & Bovenberg, A. L. (1996). Why is capital so immobile internationally? possible explanations and implications for capital income taxation. American Economic Review, 86(5), 1057–1075.

    Google Scholar 

  • Gordon, R. H., & Hines J. R. (2002). International taxation. In A. Auerbach and M. Feldstein (Eds.), Handbook of Public Economics IV, chapter 28 (pp. 1935–1995). North-Holland.

  • Gordon, R. H., & Lee, Y. (2001). Do taxes affect corporate debt policy? evidence from u.s. corporate tax return data. Journal of Public Economics, 82(2), 195–224.

    Article  Google Scholar 

  • Graham, J. R. (1996). Debt and the marginal tax rate. Journal of Financial Economics, 41(1), 41–73.

    Article  Google Scholar 

  • Graham, J. R. (2003). Taxes and corporate finance: A review. Review of Financial Studies, 16(4), 1075–1129.

    Article  Google Scholar 

  • Graham, J. R., Lemmon M. L., & Schallheim J. S., (1998). Debt, leases, taxes, and the endogeneity of corporate tax status. Journal of Finance, 53(1), 131–162.

    Article  Google Scholar 

  • Gravelle, J. G. (2003). Effects of dividend relief on economic growth, the stock market, and corporate tax preferences. National Tax Journal, 56(3), 653–672.

    Google Scholar 

  • Grullon, Michaely G. R., & Swaminathan B. (2002). Are dividend changes a sign of firm maturity?. Journal of Business, 75(3), 387–424.

    Article  Google Scholar 

  • Hansen, L. P., & Singleton K. J. (1983). Stochastic consumption, risk aversion, and the temporal behavior of asset returns. Journal of political economy, 91(2), 249–265.

    Article  Google Scholar 

  • Hassett, K. A., & Hubbard, R. G. (2002). Tax policy and business investment. In A. J. Auerbach and M. Feldstein (Eds.), Handbook of public economics III, chapter 20 (pp. 1293–1343). Amsterdam: North-Holland.

  • Haufler, A., & Schjelderup, G. (2000). Corporate tax systems and cross country profit sharing. Oxford Economic Papers, 52(2), 306–325.

    Article  Google Scholar 

  • Hines, J. R. (1999). Lessons from behavioral responses to international taxation. National Tax Journal, 52(2), 305–322.

    Google Scholar 

  • Huizinga, H. (1995). The optimal taxation of savings and investment in an open economy. Economics Letters, 47(1), 59–62.

    Article  Google Scholar 

  • Huizinga, H., & Nielsen, S.B. (1997). Capital income and profit taxation with foreign ownership of firms. Journal of International Economics, 42(1–2), 149–165.

    Google Scholar 

  • Institute for Fiscal Studies (1991). Equity for companies: A corporation tax for the 90s. Institute for Fiscal Studies, London.

  • Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–329.

    Google Scholar 

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Keen, M. (2001). Preferential regimes can make tax competition less harmful. National Tax Journal, 54(4), 757–762.

    Google Scholar 

  • Keen, M., & Ligthart, J. E. (2006). Incentives and information exchange in international taxation. International Tax and Public Finance (forthcoming).

  • Keuschnigg, C. (1994). Dynamic tax incidence and intergenerationally neutral reform. European Economic Review, 38(2), 343–366.

    Article  Google Scholar 

  • Keuschnigg, C. (2004a). Eine Unternehmenssteuerreform für mehr Wachstum in der Schweiz. Avenir Suisse, Zürich.

  • Keuschnigg, C. (2004b). IFF tax model version II, Technical model description, University of St. Gallen (IFF-HSG), St. Gallen.

  • Kydland, F. E., & Prescott, E. C. (1982). Time to built and aggregate fluctuations. Econometrica, 50, 1345–1370.

    Article  Google Scholar 

  • Lindhe, T., Södersten, J., & Öberg, A. (2004). Economic effects of taxing different organizational forms under the nordic dual income tax. International Tax and Public Finance, 11(4), 469–485.

    Article  Google Scholar 

  • Lintner, J. (1956). Distribution of incomes and corporations among dividends, retained earnings, and taxes. American Economic Review, Papers and Proceedings, 46(2), 97–113.

    Google Scholar 

  • MacKie-Mason, & Jeffrey, K. (1990). Do taxes affect corporate financing decisions? Journal of Finance, 45(5), 1471–1493.

  • MacKie-Mason, J. K., & Gordon, R. H. (1997). How much do taxes discourage incorporation? Journal of Finance, 52(2), 477–505.

    Article  Google Scholar 

  • McLure, C. E., & Zodrow, G. R. (1998). The economic case for foreign tax credits for cash flow taxes. National Tax Journal, 51(1), 1–22.

    Google Scholar 

  • Miller, M. H. (1977). Debt and taxes. Journal of Finance, 32(2), 261–275.

    Article  Google Scholar 

  • Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.

    Article  Google Scholar 

  • Nielsen, S. B., & Sørensen, P. B.(1997). On the optimality of the nordic system of dual income taxation. Journal of Public Economics, 63(3), 311–329.

    Article  Google Scholar 

  • Poterba, J. M. (2002). Taxation, risk-taking, and household portfolio behavior. In A. Auerbach and M. Feldstein (Eds.), Handbook of public economics III, chapter 19 (pp. 1109–1171). Amsterdam: North-Holland.

  • Poterba, J. M. (2004). Taxation and corporate payout policy. American Economic Review, 94, 171–175.

    Article  Google Scholar 

  • Poterba, J. M., & Summers, L. H. (1985). The economic effects of dividend taxation. In E. I. Altman and M. G. Subrahmanyam (Eds.), Recent advances in corporate finance (pp. 227–284). Richard D. Irwin, Homewood, Ill.

  • President’s Advisory Panel on Federal Tax Reform (2005). Simple, fair, and pro-growth: Proposals to fix America’s tax system. Government Printing Office, Washington D.C.

  • Razin, A., & Sadka, E. (1991). Efficient investment incentives in the presence of capital flight. Journal of International Economics, 31(1–2), 171–181.

    Article  Google Scholar 

  • Sachverständigenrat (2003). Staatsfinanzen Konsolidieren—Steuersystem Reformieren, Jahresgutachten 2003/2004, Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (Hrsg.), Wiesbaden.

  • Sinn, H.-W. (1991). The vanishing harberger triangle. Journal of Public Economics, 45(3), 271–300.

    Article  Google Scholar 

  • Sinn, H.-W. (2003). Ist Deutschland Noch Zu Retten? Econ, München.

  • Slemrod, J., Hansen, C., & Procter, R. (1997). The seesaw principle in international tax policy. Journal of Public Economics, 65(2), 163–176.

    Article  Google Scholar 

  • Sørensen, P. B. (1994). From the global income tax to the dual income tax: Recent tax reforms in the nordic countries. International Tax and Public Finance, 1(1), 57–79.

    Article  Google Scholar 

  • Sørensen, P. B. (2001). OECDTAX—A Model of Tax Policy in the OECD Economy. Technical Working Paper, Economic Policy Research Unit, University of Copenhagen.

  • Sørensen, P. B. (2005). Neutral taxation of shareholder income. International Tax and Public Finance, 12(6), 777–801.

    Article  Google Scholar 

  • Sørensen, P. B. (Ed.) (1998). Tax policy in the nordic countries. Hampshire: Macmillian Press.

Download references

Author information

Authors and Affiliations

  1. University of St. Gallen (IFF-HSG), CEPR and CESifo, Varnbüelstrasse 19, CH 9000, St. Gallen, Switzerland

    Christian Keuschnigg & Martin D. Dietz

Authors
  1. Christian Keuschnigg
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Martin D. Dietz
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Christian Keuschnigg.

Additional information

JEL Classification: D58, D92, E62, G32, H25

Rights and permissions

Reprints and permissions

About this article

Cite this article

Keuschnigg, C., Dietz, M.D. A growth oriented dual income tax. Int Tax Public Finan 14, 191–221 (2007). https://doi.org/10.1007/s10797-006-8722-4

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-006-8722-4

Keywords

Search

Navigation