Is the dual income tax a real alternative to traditional income taxes?

Abstract

In the fiscal reforms undertaken throughout the last decade, the dual income tax system, based on a broadened concept of income and progressive tax rates, has been implanted in several countries as an alternative model to traditional tax systems. The dual tax is characterised by combining a progressive taxation on labour and transfer incomes with a proportional taxation on capital income. Moreover, the capital income tax rate is generally set at the same level as the existing corporate tax rate. In this paper, the most important characteristics of both tax systems are compared. The theoretical arguments that justify these reforms are examined and then the main characteristics of the current dual taxes in the Nordic countries and Holland are analysed. We conclude with some comments on the viability of extending this tax system to other countries.