Strengthening a fiscal pillar: The Uruguayan dual income tax

This paper presents the new system of dual taxation on income that has been introduced in Uruguay to replace the incomplete schedular system applying before. The new system strengthens a pillar of taxation defined as broadly based and capable of generating substantial and stable tax revenues in a country where 60% of fiscal income is consumed by pension and interest payments; in addition, the new system redistributes some 2.5% of total household income. The paper describes the development of the system for taxing income, focusing especially on the four changes it underwent during the twentieth century. It also compares the different models of income tax in use today: (i) the traditional synthetic model, based on the Haig-Simons definition of income; (ii) the flat rate model, derived from Hall and Rabushka’s consumption tax; (iii) the Nordic dual model, which provides for separate taxation of capital income at a fixed rate and earnings at progressive rates; and (iv) the Uruguayan dual model.