Wealth has been taxed less and less in twenty years. Now the cabinet must break with that policy

An accumulation of setbacks is forcing the government to tax assets more heavily. That means a change of course compared to the past twenty years, in which wealth, compared to work and consumption, has always been kept out of the wind.

If even a prominent VVD member like Klaas Dijkhoff questions the increasing wealth inequality in the Netherlands, then something is wrong. The liberal former party leader pleaded last summer in NRC for higher taxes for slum landlords – an idea that left-wing politicians have long promoted as the ‘Prince Bernhard tax’. According to Dijkhoff, high legacies that are passed on virtually unencumbered from generation to generation within wealthy families ‘lead to inequality that threatens to cause inequality’.

No, he has not fallen from his liberal faith, declared the VVD member. What worries him is that more and more Dutch people are becoming wealthy without having worked before. Just by making money with money, while others don’t get that chance because they come from a poor family. ‘Inequality only becomes a problem if it causes inequality and gives people the feeling of living in a rigged game society in which progress in life is no longer possible’, concludes Dijkhoff in his opinion piece.

Apparently they did not receive Dijkhoff’s memo at the VVD. At least nothing has come of this yet. The party’s most recent election program, in which Dijkhoff still had a hand in, does not mention higher wealth, inheritance and gift taxes. The VVD wants to further reduce taxes for the richest Dutch people (business owners). The CDA is on the same page.

Wealth inequality relatively high

The coalition agreement of the Rutte IV cabinet also leaves assets largely untouched. D66 and ChristenUnie are in favor of higher taxes on wealth, but those parties also have other policy wishes (for example in the area of ​​the environment and climate) that they had to exchange with VVD and CDA. Their plea for a higher wealth tax did not reach the finish line in the formation negotiations. On the contrary; the agreement states that corporate tax for small and medium-sized enterprises will fall further and that the tax exemption in box 3 will rise sharply to 80 thousand euros.

The fact that wealth inequality in the Netherlands is relatively large compared to many other countries is largely the result of twenty years of VVD/CDA policy. The Netherlands has never known a cabinet without one of these two parties (including their predecessors). The current tax system therefore shows clear fingerprints of right-wing, debilitating politics.

Box system adjusted step by step

The last major revision of the tax system dates from 2001. Under the leadership of the then State Secretary for Finance Willem Vermeend (PvdA), the box system was introduced, with box 1 for income from work and the owner-occupied home, box 2 for income from one’s own company. and box 3 for income from assets other than the owner-occupied home. Vermeend had arranged those boxes in such a way that the tax burden on incomes from all three categories was approximately the same. An employee therefore paid proportionally the same amount of tax as entrepreneurs and investors.

On the initiative of the VVD and CDA, cabinets have gradually lowered the taxes for major shareholders in box 2 since 2001. Corporate income tax on corporate profits has also been reduced time and again. The argument for this was always that this would be good for employment and economic growth, and that these tax reductions for entrepreneurs would ultimately benefit all Dutch people. But those tax cuts mainly benefited the wealthiest. The CBS statistics show that the very richest Dutch people are generally entrepreneurs, or major shareholder of a company.

Major shareholders (which are generally the wealthiest Dutch people, including the Quote 500 members) also use box 2 on a large scale to keep private assets out of reach of the tax authorities. They disguise capital (such as real estate and savings) that should actually be taxed in box 3 as working capital by storing that capital in their own BV. The tax rate in box 2 is much lower than the box 3 rate. Not only that: ‘pretbox’ 2 also offers business owners plenty of options to postpone tax payment for years (which sometimes leads to cancellation). They can also transfer business assets largely tax-free to their children, so that they avoid inheritance and gift tax.

‘Small savers’ are actually wealthy

The capital gains tax (box 3), the tax on savings and securities, has also been reduced considerably in recent years. Only Dutch people who have tens of thousands of euros in savings or securities benefit from this. These are the 30 percent richest households. People with little wealth did not benefit from all those rate reductions in box 3.

That group of wealthiest Dutch people can look forward to an extra advantage this year. At the end of last year, the Supreme Court referred the current box-3 tax to the wastebasket, because it is not in accordance with European legislation. Thanks to that judgment, savers and investors who paid capital gains tax after 2016 will probably get a lot of tax back. That legislative blunder could cost the treasury up to 12 billion euros once.

There is a lot of indignation in the House of Representatives about the tax on savings, because it has been higher than the interest on savings for a few years now. Two months ago, the House unanimously adopted a motion calling on the cabinet to accommodate the ‘small saver’. The motion does not define who these ‘small savers’ are. A few MPs pointed out to their fellow parliamentarians last week that real small savers do not pay box-3 tax. The tax exemption threshold has been raised several times and is now above 50 thousand euros (100 thousand euros for tax partners). So the ‘small savers’ who should be spared according to the parliamentary motion belong to the group of wealthy Dutch people.

Taxes on consumption rose

While the tax burden on wealth fell structurally after 2001, taxes on consumption (VAT and excise duties) have only increased over the past twenty years. As a result, food, tobacco and car fuels have risen in price, among other things. This is disadvantageous for low incomes, because they spend a relatively larger part of their income on consumer goods.

The tax burden on earned income has also increased. Although the top income tax rate (box 1) has fallen, that advantage has been more than canceled out by the sharp rise in health insurance premiums. On balance, the tax burden on labor and consumption has therefore increased over the past twenty years, while the tax burden on capital (both corporate and private wealth) has fallen.

The balanced tax burden that Willem Vermeend had in mind when introducing his box system has become increasingly skewed due to the policy of the Balkenende and Rutte cabinets. Compared to other countries, the Dutch tax on (labour) income is now high, and that on private wealth and capital gains is very low.