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Canada and the United States have both experienced a substantial increase in income inequality over the last several decades. In this article, we examine the complex interaction of income inequality with tax and transfer systems in Canada and the United States. We begin by comparing the data on taxation and expenditure to understand the similarities and differences between the two countries. We then consider how changes to tax and transfer policies have affected the levels of inequality in both countries. The article concludes by offering some policy recommendations that each country may consider to address the increasing levels of inequality.

The dual income tax combines a progressive tax on labor income and a lower flat rate tax on income from capital. Denmark, Finland, Norway, and Sweden adopted dual income taxes to address a set of tax challenges that arose in the late 1980s and early 1990s. Although developing countries face much different economic, political, and tax environments from the Nordic countries, the dual income tax may be the right solution to the different set of challenges facing many developing countries. Providing separate tax rates for labor and capital income allows countries greater flexibility in addressing tax competition while retaining progressive tax rates for labor income. A dual income tax regime may also allow developing countries to rationalize the taxation of income from active business operations under the personal and corporate tax systems and the taxation of passive investment income under the personal tax system. Developing countries could also use the move to a dual income tax system as an opportunity to make broader reforms in their personal, corporate, and payroll tax systems. Finally, recent tax reforms in Russia, Ukraine, and several countries in Central and Eastern Europe have led to flat tax regimes that generally apply a single tax rate to all types of income above some zero0bracket amount. We contend that a dual income tax may provide policymakers in developing countries with an attractive alternative that addresses tax competition concerns while maintaining a progressive tax on labor income.

We consider in this paper how emerging countries may in practice best design and develop tax policies, given the complex economic and political environments they face. After an overview of what tax systems look like around the world, we discuss the principal objectives that countries may attempt to achieve through tax policy. We conclude by considering the broad political economy context within which tax policy and development issues must be designed and implemented. Our aim is to set out some of the basic issues facing tax policy in emerging countries and to outline some key elements that should be considered in designing the best feasible tax structure for any particular country at a particular time.