Recently, the book Design for a Better Tax System, composed by Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics and tax economist Sijbren Cnossen, has been published. In this book, several economists review the Dutch tax system and conclude that it is not functioning efficiently. The question however, is if the propositions in the book can also count on political support. ‘I am hoping for a political agreement on the main framework of the tax system’, says Jacobs.
Jacobs and Cnossen are co-authors of the book as well, together with 27 other economists who came up with proposals for the improvement of the current tax system. ‘The proposals we have made are to keep the tax burden constant, not to redistribute income or to increase government paternalism’, says the first chapter of the book. ‘These are questions that politicians, not economists, should discuss.’
Many possibilities for improvement
It appears from the book that the Dutch tax system can do a whole lot better. The authors write that all kinds of economic useful decisions taken by people and businesses are being disrupted because of taxes, which leads to welfare losses. The system is also unnecessarily complicated as taxes are not levied neutrally and transparently. This way, tax evasion is encouraged, and implementation and applications costs are very high. Jacobs once found that the welfare loss of one euro extra tax revenue is approximately 40 to 50 percent in the Netherlands. This outcome suggests many possibilities for improvement.
No economic logic
According to Jacobs, the most important proposal in the book is the reform of the tax system for capital incomes. ‘The biggest challenge for the Netherlands is to come up with a uniform, symmetric, neutral and efficient system of capital income taxation.’ Jacobs explains that income from savings, investments, main residence and pension are all taxed differently: sometimes flat, then progressive, then fixed or based on realised returns. This while the most important assets, the main residence and pension, are subsidised with tax deductions. There is no economic logic to this. Because these assets are largely in bricks and mortar or pension funds, the Dutch economy is very vulnerable and unstable. Therefore, the writers suggest abolishing the tax subsidies on home ownership and pensions.
The fun box
According to Jacobs, there should be a single box for all forms of capital, where income from savings, investments, main residence, pension and business are all taxed at a single rate. This would prevent entrepreneurs from exploiting Box 2, also known as the 'fun box'. After all, it is possible for entrepreneurs to pay themselves a low wage in order to avoid the progressive taxation of labour income in Box 1 and to convert this into lower taxed dividend payments in Box 2.
Lack of vision
Jacobs thinks the best-case scenario would be to reach a political agreement on the main suggestions of what the tax system should look like. It's not a problem that politicians have different views because of their different views on society and the economy. However, it becomes dangerous if that view is completely absent, because politicians no longer clearly know what they should stand for. All too often this leads to politicians hiding behind vested interests and to stop making any attempts of reforming the tax system.’
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The full article from Accountant Week, 26 March 2020, can be found here (in Dutch).
The book can be downloaded above (in Dutch).