Scandinavian Working Papers in Economics
Working Paper Series,
Uppsala University, Department of Economics
No 2006:26: How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993
Jukka Pirttilä () and Håkan Selin ()
Additional contact information
Jukka Pirttilä: Labour Institute for Economic Research, Postal: Pitkänsillanranta 3 A, 00530 Helsinki, Finland
Håkan Selin: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Abstract: Dual income tax systems have become increasingly popular; yet, relatively little is
known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.
Keywords: Taxable income; income shifting; dual tax system
40 pages, November 9, 2006
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