A rather abstract tax concept is suddenly a popular theme among the financial spokespersons in the House of Representatives. During the legislative consultations on the new Tax Plan, a number of political groups, including CDA and PvdA, asked the cabinet to lower the ‘marginal pressure’. The ChristenUnie and PVV had already written questions about this to State Secretary Marnix van Rij of Fiscal Affairs.
The MPs are very shocked by a table that the Ministry of Finance provides every year with the Tax Plan. This time it can be concluded that the marginal pressure for single earners with children will rise sharply next year from an income of 34,000 euros. A breadwinner who earns 45,000 euros gross annually is the worst off in this table with a marginal pressure of 87 percent. This person will only have 13 cents left after tax next year of every extra euro he earns (for example, by working more hours, a promotion or salary increase).
For this group it therefore hardly pays off financially to work more hours. The increase in marginal pressure for middle incomes in 2023 is a direct result of the large package of purchasing power measures for low incomes that the cabinet announced on Budget Day. Allowances and ‘fixed’ tax credits will go up next year, but in order to pay for these support measures, the cabinet is phasing out those benefits above a certain income limit. People who are just above that support limit lose part of their allowances and tax credits as soon as they start earning more. As a result, an extra euro earned net yields very little.
Economist Coen Teulings made in last week The Telegraph fuel of the extremely generous purchasing power support that the cabinet – under heavy pressure from the House of Representatives – has promised for next year. This income support, which, including the price ceiling for energy costs, is budgeted at more than 40 billion euros, does more harm than good in Teulings’s eyes. ‘There is a limit to the extent to which you can level up and that limit has been reached in the Netherlands’, says the former director of the Central Planning Bureau. He predicts that the high marginal pressure will hinder the functioning of the labor market, because working (more) simply pays too little in the Netherlands.
Relatively small group
In all this political indignation and commotion, a number of things remain underexposed. One: thanks to the purchasing power package for 2023, the marginal pressure will decrease next year for single earners earning less than 34,000 euros. So they will soon be left with more of every extra euro earned, but nobody really talks about it. Two: the worrying table in the Tax Plan concerns single earners with children, a relatively small group of Dutch people. Three: a high marginal burden should not be confused with a high tax burden. Four: the high marginal pressure is not news, because it has been a feature of the Dutch tax system for many years.
In response to parliamentary questions, Van Rij and Minister of Finance Sigrid Kaag point out to the concerned questioners that the single earners from the contested table are not very representative of the average taxpayer. For 98 percent of the Dutch, the marginal pressure will be lower than 80 percent next year, they report to the House. For incomes between 40,000 and 75,000 euros, the pressure is around 55 percent on average. For two-income couples, the marginal pressure for the least-earning partner is on average much lower than that from the sensational table in the Tax Plan.
Moreover, thanks to the purchasing power package, many Dutch people will pay less tax next year. A high tax on a euro wage increase can go hand in hand with a low tax burden on total income. After all, the marginal pressure is only about wages that someone receives, but thanks to the higher allowances and tax credits, many Dutch people will pay less tax in 2023 on the euros they already earned before that. The ministers of Finance write to the House: ‘Some of the measures in the current purchasing power package increase the marginal pressure, but at the same time ensure that households have more left over.’
Incentive to work
Due to the purchasing power support, the highest marginal pressure will shift to slightly higher income groups next year (see also the graph), but the fact that some income categories are faced with a marginal pressure of 80 percent or higher has been the case for many years. The problem that this reduces the incentive to work more has also been recognized for a long time. Research reports on this were published in 2017 and 2019, among other things, which were sent to the House of Representatives.
However, the problem is not easy to solve, as Kaag and Van Rij write again, because it is ingrained in our tax system. Since the last major tax reform in 2001, this has been decorated with all kinds of tax credits (general tax credit, income-related combination tax credit, elderly person’s tax credit, employed person’s tax credit) and allowances (care, rent, childcare allowance and child-related budget) to serve all kinds of income groups. As a result, a kind of income cliff has been built into the system: anyone who falls over that edge loses so many discounts and allowances that extra work is not very rewarding.
There are no easy solutions. One way to reduce the marginal pressure is to reduce income support, but the House has enforced this precisely because of the threat of energy poverty. The other option is to provide the same income support throughout the Netherlands. The latter costs an insane amount of money and is therefore not realistic. The only real solution is a major tax reform. Politicians have been talking about this for years, but due to fundamental differences of opinion between coalition parties about income politics, it just never happened. This cabinet has also shelved the tax reform that almost all economists have been advocating for years.
