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Cesifo DICE REPORT Journal for Institutional Comparisons oint initiative of Ludwig-Maximilians-Universität and the Ifo Institute for Economic Research CESifo DICE REPORT Journal for Institutional Comparisons VOLUME 2, NO .3 AUTUMN 2004 Forum Robin Boadway Vidar Christiansen DUAL INCOME TAX Christoph Spengel and Wolfgang Wiegard Margit Schratzenstaller Research Reports PUBLIC PROCUREMENT René L. Frey, Christoph Kilchenmann and Nicolai Krautter ENVIRONMENTAL REGULATION Ursula Triebswetter and David Hitchens Rüdiger Parsche and TAX-BASED CHILD SUPPORT Rigmar Osterkamp Reform Models MEDICAL SAVINGS ACCOUNTS IN Jonas Schreyögg and Lim Meng Kin SINGAPORE Database INFLATION TARGETING EARLY RETIREMENT INHERITANCE TAXES INCOME TAX THRESHOLDS SHADOW ECONOMY TUITION FEES News NEW AT DICE DATABASE, CONFERENCES,BOOKS The international platform of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research, Munich CESifo DICE Report ISSN 1612-0663 A quarterly journal for institutional comparisons Publisher and distributor: Ifo Institute for Economic Research e.V. Poschingerstr. 5, D-81679 Munich, Germany Telephone ++49 89 9224-0, Telefax ++49 89 9224-1462, e-mail [email protected] Annual subscription rate: n50.00 Editors: Wolfgang Ochel ([email protected]), Rigmar Osterkamp ([email protected]) Editor of this issue: Rigmar Osterkamp Copy editing: Anne Heritage, Paul Kremmel Reproduction permitted only if source is stated and copy is sent to the Ifo Institute. DICE Database: www.cesifo.de/DICE DICE Report Volume 2, Number 3 Autumn 2004 _____________________________________________________________________________________ Forum DUAL INCOME TAX The Dual Income Tax System – An Overview Robin Boadway 3 Norwegian Income Tax Reforms Vidar Christiansen 9 Dual Income Tax: A Pragmatic Reform Alternative for Germany Christoph Spengel and Wolfgang Wiegard 15 Towards Dual Income Taxes – A Country-comparative Perspective Margit Schratzenstaller 23 Research Reports Public Procurement Agreements – Problems of Implementation in Switzerland René L. Frey, Christoph Kilchenmann and Nicolai Krautter 31 The Impact of Environmental Regulation on Competitiveness in the European Cement Industry – Results of a Matched Plant Comparison between Germany, Spain and the UK Ursula Triebswetter and David Hitchens 38 Child Support and Children’s Tax Allowances in Selected European Countries Rüdiger Parsche and Rigmar Osterkamp 50 Reform Models Health-care Reforms in Singapore – Twenty Years of Medical Savings Accounts Jonas Schreyögg and Lim Meng Kin 55 Database Inflation Targeting 61 Reducing Incentives to Early Retirement 64 Inheritance Taxes 67 Thresholds for Paying Income Tax 72 Shadow Economy and Undeclared Work 75 Tuition Fees and Student Loans 77 News New at DICE Database, Conferences, Books 79 Forum DUAL INCOME TAX THE DUAL INCOME TAX They define a single measure of taxable income from all sources, and then apply a single rate sched- SYSTEM – AN OVERVIEW ule. However, some fundamental administrative and economic problems preclude the full applica- tion of the comprehensive income principle. ROBIN BOADWAY* Consider each in turn Administrative problems ECD countries rely to varying degrees on A pure comprehensive income tax system is diffi- personal income taxes to raise revenues in a O cult, if not impossible, to implement. Some ele- fair and efficient way. Yet, despite the many differ- ments of comprehensive income are hard for ences in policy and institutional settings, their households to measure let alone for tax authorities income tax systems share some common features. to verify. Examples include the following: imputed Tax policy specialists agree on the problems that income from assets of various sorts, such as hous- these features give rise to, but there is no consen- ing and other consumer durables, and insurance sus on the appropriate reforms that should be policies; accrued capital gains on financial and per- undertaken. Moreover, the record of major reforms is decidedly mixed. Commissions in many sonal assets; the return on human capital accumu- countries have presented proposals for far-reach- lated (as opposed to endowed); the return on per- ing reform of the personal tax system – an example sonal business investments; real versus nominal being the adoption of a personal consumption tax returns on financial assets; the value of the non- system – but these have been rarely adopted in market use of time for leisure or household pro- practice. A notable exception is the dual duction; and gifts and inheritances received, possi- (“Nordic”) income tax system, which as an explic- bly net of those given. itly schedular system represents a significant departure from the commonly used principle of The fact that actual income tax systems inevitably comprehensive income taxation.1 To put the tax end up excluding some sorts of income and taxing system in perspective, it is useful first to review the others preferentially (e.g., capital gains) leaves basic features of income tax systems that are based arbitrage – or evasion – opportunities to house- on the comprehensive principle and to outline the holds, and these undermine the integrity of the tax difficulties. This will serve as a basis for presenting system. Moreover, under a progressive income tax the main features of the Nordic system, which is system, horizontal equity problems can arise if it is largely motivated by addressing the problems of difficult to implement an effective income averag- comprehensive income taxation and its oft-pro- ing system: income fluctuations per se increase posed counterpart, personal consumption taxation. one’s tax liability.The consequence of these admin- istrative problems is that income tax systems can- not replicate the comprehensive income tax ideal. Comprehensive income as the basis for taxation Economic Problems Most countries’ tax systems pay at least lip service to the principle of comprehensive income taxation. A comprehensive income tax system treats all sources of income the same. Yet, standard public * Robin Boadway is Sir Edward Peacock Professor of Economic finance principles suggest that there should gener- Theory at Queen’s University, Canada; email: [email protected] ally be differential treatment of different sources 1 Comprehensive reviews of the Nordic tax system and its effects (and uses) of income. The broadest distinction of may be found in Sørensen (1994), Nielsen and Sørensen (1997) and Sørensen (1998). sources of income is between labor income and 3 CESifo DICE Report 3/2004 Forum capital income, or equivalently on the uses side ation on efficiency grounds will also lead to zero between present consumption and future con- capital income taxation on equity grounds. To the sumption. A tax on labor and capital income com- extent that inheritances could not be taxed, the bined is roughly equivalent to a system that taxes case for taxing capital income would be enhanced. future consumption more heavily than present consumption. The reason is that saving out of cur- Other arguments can be mobilized for providing rent income is double-taxed: once when the preferential treatment of capital income. To the income is earned and again when the return on extent that saving is for retirement (life-cycle that saving is earned. On efficiency grounds, it is smoothing), a case can be made for sheltering cap- hard to justify such a system. On the contrary, a ital income from taxation. For one thing, house- reasonable case can be made for taxing present holds may undersave for their retirement either and future consumption at the same rate, which in because of myopia or because they anticipate simple terms can be achieved by zero taxation of transfers inversely related to their wealth in retire- capital income to eliminate the double taxation. ment. As well, lifetime averaging arguments might Such a result requires particular assumptions suggest some sheltering of saving for retirement, in about the form of intertemporal preferences, espe- the absence of general averaging provision in the cially involving the separability of consumption tax system. Also, capital income might be much decisions from labor-leisure choices over time. more mobile internationally than labor income, in Even if these assumptions are not satisfied, there is which case national governments may prefer to no general presumption about which way they will treat it preferentially. And, along the same lines, it be violated, that is, whether the efficient tax on may be easier to evade. capital income should be positive or negative. The principle of insufficient reason suggests zero capi- tal income taxation on these grounds. In any case, Personal consumption taxation there would be little justification for taxing capital income at the same rate as labor income. One option for avoiding many of these problems is to adopt a personal consumption tax system by Similar considerations apply on equity grounds. If eliminating the taxation of capital income altogeth- the government were perfectly informed, it would er. The latter can be achieved by treating assets on want to base its redistributive taxation on exoge- either a designated or a tax-prepaid basis, allowing nously given wealth of households – their endowed households the discretion to choose subject to the human wealth (native ability) and endowed asset fact that for some assets one type of treatment may wealth. The inability to observe these endowments be more suitable than another. Designated treat- implies that some imperfect indicator of wealth ment involves
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