Towards a true dual income tax

Under the current income tax, capital income is taxed sometimes presumptively, sometimes on an actual basis and sometimes not at all. Moreover, the tax rates are sometimes proportional but in other instances progressive. Furthermore, apart from the very special treatment of freelancers, the labour income of directors/dominant shareholders in closely held companies is not taxed in the same way as the labour income of employees or sole proprietorships. The capricious taxation of capital and labour income violates basic equity and efficiency notions. To remedy these defects, a true dual income tax should be introduced, under which capital income is taxed at a moderate, uniform rate, primarily in view of its greater mobility, while labour income continues to be taxed at progressive rates. The Nordic dual income tax serves as a model for the analysis.