Strengthening a fiscal pillar: The Uruguayan dual income tax

Abstract

The authors are honorary members of the Uruguayan Tax Reform Commission and proposed the design for the "Uruguayan style" dual income tax in July 2005 in the document "Propuestas para la reforma tributaria de Uruguay 2005".

Personal Income Tax

“…If a schedular tax on 10 Usually, in the Nordic models of dual income taxes the same rate is applied to business and capital income. Uruguay, in contrast, has adopted a dual rate dual income tax with the rate on business income being set at the top rate of the labor income tax (25%) and the rate on capital income close (12%) to the bottom rate of the labor income tax (10%) (Barreix and Roca 2007). This system obviously limits the scope for arbitrage between labor and business income; Barreix and Roca (2007) assert that arbitrage between business and capital income is adequately dealt with by such rules as limiting interest deductions to the ratio between the rates on capital and business income (i.e.…”

“…A recent paper argues persuasively that the two basic pillars of taxation in most countries are the income tax and the VAT (Barreix and Roca 2007). 1 The authors argue that the VAT is excellent as a revenue raiser and works best if it is applied in the simplest and most neutral fashion possible-that is, on as broad a base as possible and preferably at a uniform rate.…”

“…This conclusion seems wellfounded as has been argued at length recently (Bird and Gendron 2007). More controversially perhaps, Barreix and Roca (2007) also argue, with special reference to Latin America, that most countries need to pay more attention to the potential of the personal income tax (PIT) both as a revenue raiser and as an important element of social cohesion. PIT plays the second of these roles both because revenue raised from this source comes mainly from higher income groups and because the personal nature of the tax strengthens the connection between taxpayers and the state.…”

“…As Barreix and Roca (2007) argue, in many countries societal disaffection with the inequities accompanying growth often seems to require some degree of visible fiscal correction if growth-facilitating policies are to be politically sustainable. There is thus an important continuing role in most fiscal systems for the income tax-the mirror of democracy as one fiscal historian labeled it (Webber and Wildavsky 1986).…”

“… See Poirson's (2006) description of the current Indian tax system for a depressingly good example of such a PIT. 4 In addition to the studies cited inBarreix and Roca (2007) see the broader survey inChu et al (2000).…”