Fixing the box tax system: learning from Europe

The box tax system, introduced in 2001, has become the costliest tax reform of all time and resulted in billions of losses for the treasury. Recently, the Raad van State (RvS) recommended further consideration of the actual return box 3 bill, due to its increased complexity. 

Previous attempts to fix the system have not yet proved successful. This is partly because attempts were first made to tax forfetary rather than actual returns. However, this was prevented by case law, due to violation of the principle of equality and the right to property. 

A new bill by the Finance Ministry with the aim of taxing regular wealth income and changes in wealth annually seems to be the solution. It aims to distinguish between liquid and illiquid private assets, each of which will be taxed differently.

Looking at Europe

It is a complicated discussion, which nevertheless brings a plus. There is now an collective agreement that carrying capacity implies that real capital gains should be taxed. In this, the Netherlands has been a major exception compared to many other European Union member states. In those other countries, realised gains on shares, bonds and real estate are taxed, with some national adjustments and exceptions. Cnossen therefore calls it surprising that little attention has been paid to the experiences of European countries around us with capital gains taxation. 

Lack of attention

There is also a lack of attention to three principle aspects. First, there is an inequality in law because the proposal invokes unnecessary tax arbitrage and would result in a transfer from Box 3 to Box 2. Cnossen believes that taxing private capital gains on a realisation basis is therefore a better solution. Second, double taxation will come into play, of retained and distributed corporate profits. Thirdly, Cnossen speaks of insufficient attention to the ‘blocking effect’, meaning that asset owners delay their sales and thus delay the taxation of profits as well. Scandinavian countries already stop this by preventing latent capital gains from being passed on to future generations and thus becoming permanently untaxed, but no attention is paid to this yet in the Netherlands.

According to Cnossen, taxing private wealth movements on a realisation basis is the preferred choice. As per him, the finance ministry should redo its homework, looking more at other countries. 

About Sijbren Cnossen

Sijbren Cnossen (88), is Emeritus Professor of Tax Law at Erasmus School of Economics and Emeritus Professor of Economics at the University of Maastricht. He is still active as Academic Partner of CPB Netherlands Bureau for Economic Policy Analysis. In the past he held appointments at the Law Schools of Harvard University, New York University and the University of Florida, the College of Europe at Bruges, and the Netherlands Institute for Advanced Studies (NIAS). He is the (co-)author of several books and numerous articles on the design and economics of taxation. Professor Cnossen is past editor of International Tax and Public Finance and De Economist. As a consultant to the IMF, World Bank, South African Treasury, OECD, EU Commission, USAID and HIID, he has advised more than 30 countries on the design and reform of their tax systems, most recently Zambia and Aruba.