## 1. Evolution of Statutory Minimum Wages for CHBs in Iceland, 2000–10

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### Introduction and context
- Dual income tax (DIT) combines a progressive tax on labor income with a relatively low, flat tax on all forms of capital income; developed in Scandinavia during the early 1990s.
- Tension in closely held businesses (CHBs): owners supply both capital and labor; allocation method between capital and labor affects marginal income tax schedules and incentives.
- Three broad allocation approaches for CHBs:
  - Imputing a return to capital with residual treated as wages.
  - Imputing a return to labor with residual treated as capital (minimum-wage based method, MWM).
  - Arbitrary formula (e.g., 50/50 split).
- Iceland adopted a minimum-wage based method (MWM) when introducing the DIT in 1997; beginning in 2010 corporate dividend payouts in excess of 20 percent of book capital were allocated 50 percent to labor and 50 percent to capital (the 20/50 allocation).

### Capital-based vs. minimum-wage–based allocation methods (mechanics and rationale)
- Asset-based methods:
  - GAM (gross asset method) and NAM (net asset method) impute a notional rate of return to gross assets or net assets/equity; imputed capital income is taxed at the KIT; residual net income is allocated to labor and taxed at PIT.
  - Equations (as presented in source):
    - NAM after-tax income:
      (1-) min[pf(K,L) – rD, r*(K-D)] + (1-W) max[0, pf(K,L)- r*(K-D) -  rD]
    - GAM after-tax income:
      (1-) min[pf(K,L) – rD, r*K - rD] + (1-W) max[0, pf(K,L) - r*K]
  - GAM often recommended for simplicity and reduced tax-arbitrage opportunities.
- Minimum wage–based method (MWM):
  - Income allocated to labor on the basis of administratively set minimum wages, residual to capital.
  - Equation (as presented in source):
    (1-) max[0, pf(K,L) – rD – W]+ (1-W) min[pf(K,L) – rD ,W]
- Reasons favoring asset-based methods (as stated):
  1. If PIT substantially higher than CIT/KIT, allocating residual income to capital (MWM) creates regressive schedules for upper-income CHB owners and horizontal inequities with similarly compensated employees.
  2. Capital income measurement is more objective (market benchmark rates) than labor inputs (skill, effort).
  3. Imputing a return to capital requires fewer administrative resources than maintaining up-to-date schedules of market-equivalent wages.

### Iceland’s dual income tax institutional evolution
- 1997: DIT introduced with a classical CIT at 33 percent and an (implied) capital income tax of 13.4 percent.
- 2002: CIT cut from 30 percent to 18 percent, accelerating incorporation.
- Iceland operates a classical system of corporate taxation; distributions subject to both CIT and KIT; partnership income rate set equal to the compound rate on corporate distributions (example: 2008 partnership tax rate 23.5% = 15%+10%*(1-15%)).
- High incorporation:
  - 33,545 corporations in 2010 (more than one for every 10 inhabitants).
  - Less than 10,000 corporations in 1993.
- Minimum wage requirements apply to owners of corporations, partnerships, and sole proprietorships; statutory minimum wages vary by business size and sector.
- Minimum capital requirements (2010):
  - Public limited company minimum share capital: ISK 4.000.000 (approx. US$35,000)
  - Private limited company minimum share capital: ISK 500.000 (US$4,500)

### Evolution of statutory minimum wages for CHBs, 2000–10
- Data and broad movements:
  - For years 2000–05, categorization shifts impede inference on real minimum wage evolution for CHB owners in many sectors; e.g., "general activities" sub-categories rose from two to five.
  - Craftsmen (no categorization changes): real minimum wages rose 35 percent during 2000–05.
  - Over 2000–05:
    - CPI: 23%
    - Nominal Wages: 38%
    - Real Wages: 12%
    - Real GDP: 23%
  - Between 2005 and 2007:
    - Nominal minimum wages raised 14–15 percent
    - Real minimum wages rose by 2 percent
  - From 2007 through 2010:
    - Tax authorities did not raise minimum wages → 25 percent erosion of their real value
    - Real GDP fell by 9 percent
    - Real market wages fell by 11 percent
- Table 1 sectoral sample (selected exact figures preserved):
  - Specialist services (A1) Nominal 58% / 15% / 0% ; Real 29% / 2% / -25%
  - General activities (B1) Nominal 59% / 15% / 0% ; Real 30% / 2% / -25%
  - Craftsmen (D1) Nominal 65% / 15% / 0% ; Real 35% / 2% / -25%

### Social charges and distributional inequities
- Social charges on wages:
  - Iceland’s social security contribution: 8.65 percent (excluded from Figures 1 and 2)
  - Minimum contribution to private, compulsory pension schemes: 12 percent
- Treatment difference:
  - Wages are subject to SSC and pension contributions.
  - Self-employed in all CHB forms are subject to SSCs only on the statutory minimum wage, even if full income is taxed under PIT, effectively capping the SSC base for the self-employed while salaried workers face an uncapped SSC base.

### High incorporation, dividends vs. wages, and revenue implications
- High incorporation linked to >10-point spread between capital and labor tax rates and low minimum wages → substantial labor income taxed as capital income.
- Taxpayer return data on wages and dividends from same corporation:
  - 70 percent of taxpayers in this category earn predominantly wages
  - About 16 percent earn at least 70 percent dividends
  - Top two percent earn more than 90 percent dividends
- For the entire group: dividends equaled 700 percent of paid-in capital in 2009.
- Illustrative counterfactual: if two-thirds of distributed income received by corporate owner/employees in 2009 had been wages, an additional ISK 11.5 billion in dividends would have been reallocated from capital to labor.

### The 20/50 allocation method and post-crisis tax changes
- 20/50 rule (beginning 2010): minimum wage allocation maintained; dividend payouts that exceed 20 percent of corporate net assets are allocated 50 percent to capital and 50 percent to labor.
- Simulation 2000–09 — total tax change per CHB distributions (selected rows):
  - 2000: Number of Households 1,998 ; Total Tax Change/CHB Distributions 1.2%
  - 2005: 6,338 ; 1.5%
  - 2007: 7,251 ; 1.0%
  - 2009: 5,970 ; 3.9%
- Anticipation of 20/50 boosted CHB dividend payouts in 2009 despite low profits.
- Post-crisis tax changes narrowing wedge:
  - CIT and capital income tax rates increased in stages to 20 percent → total dividend and partnership tax rate = 36 percent vs. 2008 rate of 23.5 percent.
  - Basic PIT rate raised from 35.7 percent to 37.3 percent; two higher PIT brackets of 2.9 and 6 percent imposed.
  - SSC charges raised from 5.34 percent to 8.65 percent.
  - Rate differential between total dividend tax rate and basic PIT plus SSC narrowed by more than 7 percentage points to just under 10 percent.
  - Capital income still taxed advantageously relative to labor income for income above basic PIT allowance of ISK 1.4 million (US$12,200).
- Behavioral response: many corporations with high dividend payouts converted into partnerships → 18.5 percent jump in number of partnerships in 2010.

### Asset-based allocation methods: GAM and NAM simulations (methodology)
- Two asset-based methods analyzed: GAM and NAM.
- Two imputed rates of return to capital used: "risk-free" 7 percent and 15 percent.
- Sample restrictions:
  - CHB owners defined as individuals owning >5 percent of private corporation stock and receiving ≥ ISK 800,000 in wages from that company.
  - Sectoral sample restricted to CHB owners receiving ≥ 50 percent of total PIT income from a CHB (reduces sample by ~1,000 observations).
  - NAM sample size slightly higher: 5,078 vs. 5,026 (GAM).
- Income definitions and allocation rules (as presented):
  - Total CHB income = current-year owner’s wages + owner’s share of net income (profits less interest expense).
  - GAM capital income = lesser of (1) owner’s share of total CHB income or (2) imputed return to capital (owner’s share of assets × imputation rate) − owner’s share of interest expense; residual → labor.
  - NAM capital income = lesser of (1) total CHB income or (2) imputed return to equity (owner’s share of net equity × imputation rate); residual → labor.
- Revenue change reporting: columns show Change in PIT, Change in CIT, Tax Change/CHB Income, and upper/lower bounds if KIT falls to zero (100% KIT Loss).

### Aggregate revenue effects (selected GAM and NAM results, 2000–09)
- GAM — Tax Change/CHB Income (7% imputed):
  - 2000: 4.7% ; 2004: 10.8% ; 2005: 11.4% ; 2007: 10.5% ; 2009: 13.7%
- GAM — Tax Change/CHB Income (15% imputed):
  - 2000: 2.1% ; 2004: 4.5% ; 2007: 6.0% ; 2009: 7.9%
- NAM — Tax Change/CHB Income (7% imputed):
  - 2000: 5.0% ; 2004: 12.9% ; 2005: 13.0% ; 2007: 11.0% ; 2009: 14.9%
- NAM — Tax Change/CHB Income (15% imputed):
  - 2000: 3.5% ; 2004: 9.8% ; 2005: 10.4% ; 2007: 8.6% ; 2009: 12.2%
- Key patterns:
  - Both GAM and NAM generally increase wage income and lower capital income → increase PIT and CIT revenue due to progressive PIT.
  - NAM reallocates more income to wages than GAM for both imputation rates → NAM raises more net revenue than GAM.
  - 7 percent imputation raises more net revenue than 15 percent for both methods.
  - Exceptions: GAM in 2000–2001 lowered wage income and increased capital income relative to MWM; NAM still increased PIT in those years.

### Distributional and sectoral impacts (2009 detailed findings)
- Income-distribution effects:
  - Both methods reduce net PIT and CIT liabilities for lower-wage CHB owners and increase them for higher-wage CHB owners.
  - Progressivity stronger for 7 percent imputation and stronger for NAM than GAM.
  - Taxpayers with < ISK 3 million in total PIT income experience falls in wage income and total tax liabilities under all scenarios.
  - Taxpayers with ≥ ISK 10 million in PIT income experience rises in wage income and a net tax increase of at least 14 percent of total CHB income.
- Representative 2009 totals (selected):
  - GAM total (7%): No. CHB Owners 5,026 ; Change in PIT 9,091 ; Change in CIT -2,735 ; Tax Change/CHB Income 13.7% ; 100% KIT Loss 8.2%
  - GAM total (15%): No. CHB Owners 5,026 ; Change in PIT 4,900 ; Change in CIT -1,256 ; Tax Change/CHB Income 7.9% ; 100% KIT Loss 2.4%
  - NAM total (7%): No. CHB Owners 5,078 ; Change in PIT 10,057 ; Change in CIT -3,063 ; Tax Change/CHB Income 14.9% ; 100% KIT Loss 9.4%
  - NAM total (15%): No. CHB Owners 5,078 ; Change in PIT 8,106 ; Change in CIT -2,380 ; Tax Change/CHB Income 12.2% ; 100% KIT Loss 6.7%
- Sectoral heterogeneity (selected 2009 figures):
  - NAM 15% Tax Change/CHB Income range:
    - Water and waste and Mining: as little as 4.1%
    - Arts and entertainment: up to 16.9%
  - Sectors with above-average tax increases across rates and methods:
    - Health and social work; arts and entertainment; administrative and support services; transportation and storage
  - Sectors with lowest increases:
    - Construction; real estate; mining
  - Examples (NAM 7% Tax Change/CHB Income):
    - Manufacturing: 17.1%
    - Transportation and storage: 18.3%
    - Arts, entertainment and recreation: 19.2%
    - Agriculture, forestry and fishing: 17.3%
  - Examples (GAM 7% Tax Change/CHB Income):
    - Transportation and storage: 17.9%
    - Finance and insurance: 16.6%
    - Arts, entertainment and recreation: 18.2%
    - Construction: 10.0%

### Policy implications, conclusions, and avenues for further research
- Main conclusions:
  - Shifting from MWM to GAM or NAM with 7 percent or 15 percent imputation rates could raise substantial PIT and CIT revenue from CHBs.
  - NAM raises somewhat more revenue than GAM, implying imputation rates exceed actual CHB borrowing rates.
  - Revenue increases primarily from net reallocation of income from capital to labor, subjecting it to higher progressive PIT rates.
  - Asset-based methods tend to be progressive: they lower tax burdens for low-wage CHB owners and raise them for high-wage owners (after applying GAM/NAM).
- Caveats and design considerations:
  - In 2000–2001, GAM with 15 percent imputation could raise allocation to capital relative to MWM, reflecting early-decade wage extraction patterns.
  - Consideration for very small businesses with significant capital assets: an optional lower-rate regime for small CHBs (analogous to Finland’s) may be warranted.
  - Sectoral impacts vary by capital intensity; skilled labor–intensive sectors face above-average tax-burden increases, capital-intensive sectors more modest increases.
- Further research suggested:
  - Formally model incentive effects of wage-based vs. asset-based methods for CHB owners under a dual income tax.
  - Estimate effect of an optional lower capital income imputation rate for small businesses.
  - Develop income stratification based on total wage and capital income (CHB and non-CHB) to better assess relative progressivity.

### Key statistics and numeric facts (exactly as presented)
- Example assumptions used in Figures 1 and 2:
  - Minimum wage: ISK 6 million
  - Assets: ISK 25 million
  - Capital imputation rate: 15 percent
  - 2010 tax rates: CIT and KIT both 20 percent; PIT rate progresses from 37.3 percent to 46.2 percent with a threshold of ISK 1.4 million (US$12,000)
- Social charges:
  - Iceland’s social security contribution: 8.65 percent (excluded from Figures 1 and 2)
  - Minimum contribution to private, compulsory pension schemes: 12 percent
- Corporate counts:
  - 33,545 corporations in 2010
  - Less than 10,000 corporations in 1993
- Historical tax rates and examples:
  - 1997: classical CIT at 33 percent and an (implied) capital income tax of 13.4 percent
  - 2002: CIT cut from 30 percent to 18 percent
  - 2008 example: CIT 15 percent and KIT 10 percent yielding a partnership tax rate of 23.5% = 15%+10%*(1-15%)
- 2010 minimum-wage example:
  - Specialists supervising 15 workers (category “A1”) minimum wage: ISK 8.7 million (about US$72,500)
- Minimum share capital requirements (2010):
  - Public limited company: ISK 4.000.000 (approx. US$35,000)
  - Private limited company: ISK 500.000 (US$4,500)
- Dividend income-splitting reform (2010):
  - Corporate dividend payouts in excess of 20 percent of book capital were allocated 50 percent to labor and 50 percent to capital.
- Simulation highlight:
  - If two-thirds of distributed income received by corporate owner/employees in 2009 had been wages, an additional ISK 11.5 billion in dividends would have been reallocated from capital to labor.

*Source: IMF working paper chapter titled "1. Evolution of Statutory Minimum Wages for CHBs in Iceland, 2000–10."*

### 1. Evolution of Statutory Minimum Wages for CHBs in Iceland, 2000–10............................11

### 1. Evolution of Statutory Minimum Wages for CHBs in Iceland, 2000–10

### Introduction
- Dual income tax (DIT) combines a progressive tax on labor income with a relatively low, flat tax on all forms of capital income; developed in Scandinavia during the early 1990s.
- Tension arises in closely held businesses (CHBs) because owners supply both capital and labor; allocation method between capital and labor affects marginal income tax schedules and incentives.
- Three broad allocation approaches for CHBs:
  - Imputing a return to capital with residual treated as wages.
  - Imputing a return to labor with residual treated as capital (minimum-wage based method, MWM).
  - Arbitrary formula (e.g., 50/50 split).
- Most Scandinavian countries use capital asset–based methods (asset-based), Iceland adopted a minimum-wage based method (MWM) when introducing the DIT in 1997.
- After the 2008 financial crisis, Iceland introduced an income-splitting regime layered on top of the MWM: beginning in 2010, corporate dividend payouts in excess of 20 percent of book capital were allocated 50 percent to labor and 50 percent to capital.

### Capital-based vs. Labor-based allocation methods
- Under asset-based methods:
  - A notional rate of return is imputed to gross assets (GAM) or net assets/equity (NAM); imputed capital income is taxed at the KIT; residual net income is allocated to labor and taxed at PIT.
  - Equations from the source:
    - NAM after-tax income:
      (1-) min[pf(K,L) – rD, r*(K-D)] + (1-W) max[0, pf(K,L)- r*(K-D) -  rD]
    - GAM after-tax income:
      (1-) min[pf(K,L) – rD, r*K - rD] + (1-W) max[0, pf(K,L) - r*K]
  - GAM often recommended for greater simplicity and reduced tax-arbitrage opportunities.
- Under minimum wage–based method (MWM):
  - Income allocated to labor on the basis of administratively set minimum wages, residual to capital.
  - Equation from the source:
    (1-) max[0, pf(K,L) – rD – W]+ (1-W) min[pf(K,L) – rD ,W]
- Reasons experts and Scandinavian practice favor asset-based methods (as stated in the source):
  1. If PIT is substantially higher than CIT/KIT, allocating residual income to capital (MWM) creates a regressive schedule for upper-income CHB owners and horizontal inequities with similarly compen­sated employees.
  2. Capital income measurement is arguably more objective (market benchmark rates) than labor inputs (skill, effort).
  3. Imputing a return to capital requires fewer administrative resources than maintaining up-to-date schedules of market-equivalent wages.
- Illustrative numeric example (from figures and assumptions in the source):
  - Minimum wage: ISK 6 million (US$52,000)
  - Assets: ISK 25 million (US$217,000)
  - Capital imputation rate: 15 percent
  - 2010 tax rates: CIT and KIT both 20 percent; PIT rate progresses from 37.3 percent to 46.2 percent with a threshold of ISK 1.4 million (US$12,000)
  - Observation: CHB owners with more than ISK 9.75 million in income pay less tax under the MWM than under the GAM; low-income and high-income owners tend to prefer the MWM, moderate-income owners are better off under the asset-based method.
- Social security and pension contributions treatment (important distributional/inequity point):
  - Wages are subject to an 8.65 percent social security contribution (SSC), plus a minimum contribution of 12 percent to private, compulsory pension schemes.
  - Self-employed in all CHB forms are subject to SSCs only on the statutory minimum wage, even if full income is taxed under PIT, effectively capping the SSC base for the self-employed while salaried workers face an uncapped SSC base.

### Iceland’s dual income tax
- Evolution and institutional context:
  - In 1997 Iceland introduced the dual income tax with a classical CIT at 33 percent and an (implied) capital income tax of 13.4 percent.
  - Corporate taxation changes and legal changes since early 1990s encouraged incorporation; number of corporations rose sharply (see numeric facts below).
  - In 2002, a cut in the CIT rate from 30 percent to 18 percent accelerated incorporation of sole proprietorships into corporations.
  - Iceland operates a classical system of corporate taxation (unlike corporate integration models), so distributions are subject to both CIT and KIT; partnership income rate is set equal to the compound rate on corporate distributions to prevent arbitrage.
  - Example partnership rate calculation cited: in 2008 the CIT rate was 15 percent and the KIT rate was 10 percent, so the partnership tax rate was 23.5% = 15%+10%*(1-15%).
- Structural and behavioral implications highlighted in the source:
  - High rate of incorporation: in 2010 there were a total of 33,545 corporations (more than one for every 10 inhabitants); this number rose from less than 10,000 in 1993.
  - Legislative and tax changes encouraging incorporation: split corporate tax rate (1993), private limited corporations (1994), introduction of the DIT (1997), reductions in CIT (2002).
  - Minimum wage requirements apply to owners of corporations, partnerships, and sole proprietorships; depending on business size and sector, owners must pay themselves a statutory minimum amount as wages, subject to PIT and social security taxes.
  - Statutory minimum wages can be very low in some categories (example from 2010): specialists supervising 15 workers (category “A1”) would have reported an annual minimum wage of ISK 8.7 million (Table 1) = about US$72,500.
- Administrative and incentive considerations:
  - Statutory minimum wages must be reset annually to prevent erosion by inflation.
  - Because imputing low labor income benefits CHB owners relative to salaried employees, there is an incentive for individuals to market labor as independent consultants/incorporate if they can meet minimum capital requirements.
  - Minimum capital requirements cited for 2010:
    - Public limited company minimum share capital: ISK 4.000.000 (approx. US$35,000)
    - Private limited company minimum share capital: ISK 500.000 (US$4,500)

### Key statistics and numeric facts (preserved exactly as in source)
- Example assumptions used in Figures 1 and 2:
  - Minimum wage: ISK 6 million
  - Assets: ISK 25 million
  - Capital imputation rate: 15 percent
  - 2010 tax rates: CIT and KIT both 20 percent; PIT rate progresses from 37.3 percent to 46.2 percent with a threshold of ISK 1.4 million (US$12,000)
- Social charges:
  - Iceland’s social security contribution: 8.65 percent (excluded from Figures 1 and 2)
  - Minimum contribution to private, compulsory pension schemes: 12 percent
- Corporate counts:
  - 33,545 corporations in 2010
  - Less than 10,000 corporations in 1993
- Historical tax rates and examples:
  - 1997: classical CIT at 33 percent and an (implied) capital income tax of 13.4 percent
  - 2002: CIT cut from 30 percent to 18 percent
  - 2008 example: CIT 15 percent and KIT 10 percent yielding a partnership tax rate of 23.5% = 15%+10%*(1-15%)
- 2010 minimum-wage example:
  - Specialists supervising 15 workers (category “A1”) minimum wage: ISK 8.7 million (about US$72,500)
- Minimum share capital requirements (2010):
  - Public limited company: ISK 4.000.000 (approx. US$35,000)
  - Private limited company: ISK 500.000 (US$4,500)
- Dividend income-splitting reform (2010):
  - Corporate dividend payouts in excess of 20 percent of book capital were allocated 50 percent to labor and 50 percent to capital.

*Source: IMF working paper chapter titled "1. Evolution of Statutory Minimum Wages for CHBs in Iceland, 2000–10."*

### 8.3 percent per year during 2000–10; ideally, the wage should also be adjusted to reflect

### _wp12263 - 8.3 percent per year during 2000–10; ideally, the wage should also be adjusted to reflect

### Evolution of statutory minimum wages for CHBs (2000–10)
- For years 2000–05, categorization shifts impede inference on real minimum wage evolution for CHB owners in many sectors; e.g., "general activities" sub-categories rose from two to five.
- Craftsmen (no categorization changes): real minimum wages rose 35 percent during 2000–05.
- Over 2000–05:
  - CPI: 23%
  - Nominal Wages: 38%
  - Real Wages: 12%
  - Real GDP: 23%
- Between 2005 and 2007:
  - Nominal minimum wages raised 14–15 percent
  - Real minimum wages rose by 2 percent
- From 2007 through 2010:
  - Tax authorities did not raise minimum wages → 25 percent erosion of their real value
  - Real GDP fell by 9 percent
  - Real market wages fell by 11 percent
- Table 1 sectoral sample (selected exact figures preserved):
  - Specialist services (A1) Nominal 58% / 15% / 0% ; Real 29% / 2% / -25%
  - General activities (B1) Nominal 59% / 15% / 0% ; Real 30% / 2% / -25%
  - Craftsmen (D1) Nominal 65% / 15% / 0% ; Real 35% / 2% / -25%
  - (Other categories shown in source with identical format and values)

### High incorporation, distribution of wages vs. dividends, and revenue implications
- High incorporation linked to >10-point spread between capital and labor tax rates and low minimum wages → substantial labor income taxed as capital income.
- Taxpayer return data on wages and dividends from same corporation:
  - 70 percent of taxpayers in this category earn predominantly wages
  - About 16 percent earn at least 70 percent dividends
  - Top two percent earn more than 90 percent dividends
- For the entire group: dividends equaled 700 percent of paid-in capital in 2009.
- Illustrative counterfactual: if two-thirds of distributed income received by corporate owner/employees in 2009 had been wages, an additional ISK 11.5 billion in dividends would have been reallocated from capital to labor.

### The 20/50 allocation method (introduced beginning 2010)
- Under 20/50: minimum wage allocation maintained; dividend payouts that exceed 20 percent of corporate net assets are allocated 50 percent to capital and 50 percent to labor.
- Simulation 2000–09 (Table 3) — total tax change per CHB distributions (selected rows):
  - 2000: Number of Households 1,998 ; Total Tax Change/CHB Distributions 1.2%
  - 2005: 6,338 ; 1.5%
  - 2007: 7,251 ; 1.0%
  - 2009: 5,970 ; 3.9%
- Anticipation of 20/50 boosted CHB dividend payouts in 2009 despite low profits.
- Post-crisis tax changes narrowing wedge:
  - CIT and capital income tax rates increased in stages to 20 percent → total dividend and partnership tax rate = 36 percent vs. 2008 rate of 23.5 percent.
  - Basic PIT rate raised from 35.7 percent to 37.3 percent; two higher PIT brackets of 2.9 and 6 percent imposed.
  - SSC charges raised from 5.34 percent to 8.65 percent.
  - Rate differential between total dividend tax rate and basic PIT plus SSC narrowed by more than 7 percentage points to just under 10 percent.
  - Capital income still taxed advantageously relative to labor income for income above basic PIT allowance of ISK 1.4 million (US$12,200).
- Behavioral response: many corporations with high dividend payouts converted into partnerships → 18.5 percent jump in number of partnerships in 2010.

### Asset-based allocation methods: GAM and NAM — methodology and scenarios
- Two asset-based methods analyzed: GAM (general asset method) and NAM (net asset method).
- Two imputed rates of return to capital used: "risk-free" 7 percent and 15 percent (allowing substantial equity risk premium).
- Sample restrictions:
  - CHB owners defined as individuals owning >5 percent of private corporation stock and receiving ≥ ISK 800,000 in wages from that company.
  - For sectoral breakdown, sample limited to CHB owners receiving ≥ 50 percent of total PIT income from a CHB (reduces sample by ~1,000 observations).
  - NAM sample size slightly higher: 5,078 vs. 5,026 (GAM) due to later extraction.
- Income definitions:
  - Total CHB income = current-year owner’s wages + owner’s share of net income (profits less interest expense).
  - GAM capital income = lesser of (1) owner’s share of total CHB income or (2) imputed return to capital (owner’s share of assets × imputation rate) − owner’s share of interest expense; residual → labor.
  - NAM capital income = lesser of (1) total CHB income or (2) imputed return to equity (owner’s share of net equity × imputation rate); residual → labor.
- Revenue change reporting: columns show Change in PIT, Change in CIT, Tax Change/CHB Income, and upper/lower bounds if KIT falls to zero (100% KIT Loss).

### Aggregate revenue effects (GAM and NAM, 2000–09)
- GAM annual totals (7% imputed return) — Tax Change/CHB Income (selected years):
  - 2000: 4.7% ; 2004: 10.8% ; 2005: 11.4% ; 2007: 10.5% ; 2009: 13.7%
- GAM annual totals (15% imputed return) — Tax Change/CHB Income (selected years):
  - 2000: 2.1% ; 2004: 4.5% ; 2007: 6.0% ; 2009: 7.9%
- NAM annual totals (7% imputed) — Tax Change/CHB Income (selected years):
  - 2000: 5.0% ; 2004: 12.9% ; 2005: 13.0% ; 2007: 11.0% ; 2009: 14.9%
- NAM annual totals (15% imputed) — Tax Change/CHB Income (selected years):
  - 2000: 3.5% ; 2004: 9.8% ; 2005: 10.4% ; 2007: 8.6% ; 2009: 12.2%
- Key patterns:
  - Both GAM and NAM generally increase wage income and lower capital income → increase PIT and CIT revenue due to progressive PIT.
  - Exceptions: GAM in 2000–2001 lowered wage income and increased capital income relative to MWM (due to early-decade predominance of wage extraction under MWM); NAM still increased PIT in those years.
  - NAM reallocates more income to wages than GAM for both imputation rates → NAM raises more net revenue than GAM.
  - 7 percent imputation raises more net revenue than 15 percent for both methods.

### Distributional and sectoral impacts (2009 detailed findings)
- Income-distribution effects (GAM, NAM; 7% vs 15%):
  - Both methods reduce net PIT and CIT liabilities for lower-wage CHB owners and increase them for higher-wage CHB owners.
  - Progressivity stronger for 7 percent imputation and stronger for NAM than GAM.
  - Taxpayers with < ISK 3 million in total PIT income experience falls in wage income and total tax liabilities under all scenarios.
  - Taxpayers with ≥ ISK 10 million in PIT income experience rises in wage income and a net tax increase of at least 14 percent of total CHB income.
- Representative GAM 2009 totals (selected):
  - GAM total (7%): No. CHB Owners 5,026 ; Change in PIT 9,091 ; Change in CIT -2,735 ; Tax Change/CHB Income 13.7% ; 100% KIT Loss 8.2%
  - GAM total (15%): No. CHB Owners 5,026 ; Change in PIT 4,900 ; Change in CIT -1,256 ; Tax Change/CHB Income 7.9% ; 100% KIT Loss 2.4%
- Representative NAM 2009 totals (selected):
  - NAM total (7%): No. CHB Owners 5,078 ; Change in PIT 10,057 ; Change in CIT -3,063 ; Tax Change/CHB Income 14.9% ; 100% KIT Loss 9.4%
  - NAM total (15%): No. CHB Owners 5,078 ; Change in PIT 8,106 ; Change in CIT -2,380 ; Tax Change/CHB Income 12.2% ; 100% KIT Loss 6.7%
- Sectoral heterogeneity (selected figures for 2009):
  - NAM 15% Tax Change/CHB Income ranges:
    - Water and waste and Mining: as little as 4.1%
    - Arts and entertainment: up to 16.9%
  - Sectors with above-average tax increases across rates and methods:
    - Health and social work; arts and entertainment; administrative and support services; transportation and storage
  - Sectors with lowest increases:
    - Construction; real estate; mining
  - Examples (NAM 7% Tax Change/CHB Income):
    - Manufacturing: 17.1%
    - Transportation and storage: 18.3%
    - Arts, entertainment and recreation: 19.2%
    - Agriculture, forestry and fishing: 17.3%
  - Examples (GAM 7% Tax Change/CHB Income):
    - Transportation and storage: 17.9%
    - Finance and insurance: 16.6%
    - Arts, entertainment and recreation: 18.2%
    - Construction: 10.0%

### Policy implications, conclusions, and further research
- Main conclusions:
  - Shifting from a minimum wage-based allocation method (MWM) to GAM or NAM with 7 percent or 15 percent imputation rates could raise substantial PIT and CIT revenue from CHBs.
  - NAM raises somewhat more revenue than GAM, implying imputation rates exceed actual CHB borrowing rates.
  - Revenue increases primarily from net reallocation of income from capital to labor, subjecting it to higher progressive PIT rates.
  - Asset-based methods tend to be progressive: they lower tax burdens for low-wage CHB owners and raise them for high-wage owners (caveat: income stratification is after applying GAM/NAM).
- Caveats and considerations:
  - In 2000–2001, GAM with 15 percent imputation could raise allocation to capital relative to MWM, reflecting early-decade wage extraction patterns.
  - Concern for impact on very small businesses with significant capital assets suggests considering an optional lower-rate regime for small CHBs (analogous to Finland’s).
  - Sectoral impacts vary by capital intensity; skilled labor-intensive sectors face above-average increases in tax burden, while capital-intensive sectors face more modest increases.
- Areas for further research:
  - Formally model incentive effects of wage-based vs. asset-based methods for CHB owners under a dual income tax.
  - Estimate effect of an optional lower capital income imputation rate for small businesses.
  - Develop income stratification based on total wage and capital income (CHB and non-CHB) to better assess relative progressivity.

*Source: IFS database; Rikisskattsjori; RSK; and authors' calculations (citations and tables as presented in the source text).*

### References

### References

### Cited works
- Cnossen, S.,1999, “Taxing Capital Income in the Nordic Countries: A Model for the EU?” Finanzarchiv 56, pp. 18–50.
- Eggert, W. and B. Genser, 2005, “Dual Income Taxation in EU Member Countries,” CESifo DICE Report 1/2005.
- Sorenson, P., 2007, “The Nordic Dual Income Tax: Principles, Practices and Relevance for Canada,” Canadian Tax Journal 55(3), pp. 557–602.

*Source: _wp12263 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12263.pdf_