Does it just seem that way, or is there really something of frustration in the reports from the Central Planning Bureau about the relationship between wealth and income inequality and the state of the Dutch tax system? Take these sentences from the CPB publication published on Wednesday:The tallest trees catch less wind: tax burden on incomes and assets‘: “What degree of inequality is desirable or acceptable is a political question. This also applies to the extent to which the tax system should have a redistributive effect, but most people believe that redistribution through taxes is desirable.”
Between the lines it says: dear government, regardless of your political affiliation, do something about the way income and wealth are taxed!
The sentences are part of an exhaustive analysis that the Planning Bureau has made before: due to a forest of tax rules, boxes and deductions, wealth and income inequality in the Netherlands continues to increase. On paper, income tax is progressive, but in practice the most prosperous households have more opportunities to reduce the tax burden on income and wealth than other households.
If the differences between specific groups – for example tenants versus homeowners, or salaried workers versus directors-majority shareholders – continue to increase, the CPB states, this could harm equality of opportunity and future prosperity. All kinds of tax regulations, such as those regarding home ownership and pension accrual, create large differences in tax burden for people with the same gross incomes. “While the economic substantiation for this is often lacking,” according to the CPB.
Because first and foremost: differences in income and assets can contribute to greater material prosperity, as long as they are the result of talent, effort and entrepreneurship. It is up to the government to support, through redistribution through taxes, that part of the Netherlands that is insufficiently able to shape its own future.
The big problem, the CPB notes, is that the Dutch tax system is now increasing inequality rather than reducing it. In principle, every tax disrupts free economic movement, says the Planning Bureau, and must be treated with caution. These ‘disruptions’ can thus be used in a targeted manner to dampen excesses. Or to promote certain types of work or assets, such as labor-intensive services or investing in start-up companies.
In practice, the most prosperous households actually have more options to reduce the tax burden
Unintentional and undesirable
On paper, the highest income groups have the highest tax burden, the 1 percent with the highest incomes officially pay more than 40 percent tax. But in practice, the most prosperous households manage to reduce that tax burden significantly, to less than 30 percent for the richest 0.01 percent of income earners. In particular, households that manage to place (part of) their assets in box 2 benefit excessively from lower rates and especially from the option to postpone payment of taxes almost indefinitely. These are unintentional and undesirable disruptions, according to the CPB.
Something similar is happening on the wealth side: types of wealth are taxed completely differently. For example, your own home and pension accrual are hardly taxed, while assets in box 3 (savings and investments) have a much higher tax burden. As a result, low-taxed asset types in particular have risen sharply in recent years (home, pension and substantial interest), while assets in box 3 tended to decline.
The CPB recommends abolishing the employment tax credit, the mortgage interest deduction and the low profit tax rate for entrepreneurs
The CPB takes a remarkably firm position based on the observed growth in income inequality and between groups of wealthy people. It does so as would be expected of economists: with “policy recommendations” and “thinking lines” that should “ensure fewer economic disruptions.” The implications are nevertheless significant: the planning agency recommends abolishing the employment tax credit, the mortgage interest deduction and the low profit tax rate for entrepreneurs.
The government can then use the extra money that the tax authorities can collect as a result to alleviate burdens elsewhere. This creates a less complex and less disruptive system, which at the same time reduces the differences in tax burden for equal income.
Tackling abuse box 2
The scope for prosperous households to save in box 2 instead of doing business must also be ended. This will lead to complicated definition discussions, the CPB warns, and is therefore difficult. It is simpler to put limits on ‘abuse’ of box 2. This can be done by further restricting the possibility of borrowing tax-efficiently from one’s own BV and by endlessly passing on the tax on capital. Encouraging entrepreneurial capacity to drive innovation should be encouraged.
For income tax, the CPB suggests an increase in the highest rates and a reduction in deductions. According to the Planning Bureau, a higher notional rental value and allowing prosperous elderly people to contribute to the state pension can also contribute to a fairer system that causes less economic disruption.
According to the Planning Bureau, it is certain that something must be done about current inequality and its demonstrably negative effects on prosperity, on the (decreasing) legitimacy of taxation and tax morale. As the CPB itself notes, this is a political and social choice, but the overwhelming evidence that points towards a slightly more reasonable distribution of the tax burden cannot actually be ignored, the CPB suggests. Because the Netherlands as a whole will benefit from this.
