Allocating Business Income between Capital and Labor under a Dual Income Tax: The Case of Iceland
IMF Working Papers, November 1, 2012
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Bibliographic details
- Authors: Thornton Matheson, Pall Kollbeins
- Published: November 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475515411.001
Summary and Research Question
- Iceland allocates the income of closely held businesses (CHBs) between capital and labor based on administratively set minimum wages rather than an imputed return to book assets.
- The paper contrasts the relative tax burdens of the current minimum wage system with asset-based allocation methods.
- Main finding: switching to an asset-based method could increase tax revenues from CHBs in a generally progressive manner.
- Distributional implication: the shift would raise the tax burden of skilled labor-intensive industries more than that of capital-intensive industries.
Findings and Comparative Results
- Current system: allocation based on administratively set minimum wages.
- Alternative considered: asset-based allocation methods (imputed return to book assets).
- Empirical conclusion: asset-based allocation could increase tax revenues from CHBs.
- Distributional outcome: increases in tax burden would be generally progressive.
- Sectoral outcome: skilled labor-intensive industries bear larger increases in tax burden than capital-intensive industries.
Policy Implications and Recommendations
- Consider shifting from administratively set minimum-wage allocation toward an asset-based allocation method to increase revenues from closely held businesses.
- Anticipate and evaluate the differential incidence across industries, particularly the greater impact on skilled labor-intensive sectors.
- Account for equity considerations given the generally progressive revenue effects.