The system that costs 9 percentage points in income tax

The Netherlands is the country with the most skewed intergenerational wealth distribution in Europe: this is illustrated by the fact that Dutch people reach the top of their wealth when they die. On average, elderly people that own a house have built up a wealth of 300,000 euros. This is in part due to the tax system: investing in real-estate is very attractive and only feasible for wealthy (and therefore elderly) people. Rental income isn’t taxed and the capital gains tax effectively is half of the normal rate for houses, since only half of the worth of a house is taxed. Furthermore, a lot of income is unearned: income that doesn't require an economic effort. In a series of articles on western capitalism, Jacobs argues that unearned income becomes an increasingly greater part of the total income earned by the wealthy. This is caused by the phenomenon that flexible workers have to bear more and more of the risks of a company, which leads companies to become more powerful. 

Fictitious return on investments

According to Jacobs, one of the biggest problems is the way that wealth is taxed in the Netherlands: ‘In the Netherlands, we don’t pay taxes for capital income such as dividends, rental income or capital gains on shares. We tax a fictitious return, which means that we just make an assumption on one’s returns.’ Since 2001, almost all economists and tax experts are in favour of using a system that taxes real capital income. For economists, this is logical: the current situation is inadequate, unfair and problematic for the government, since the current legislation leaves room to spare which can be used to make mock constructions to evade taxes.

Housing market

The increase in prices for houses is for a great part caused by this system: Jacobs makes the rough estimation that house prices increase by 1% for each percent of tax benefits put in place for house owners. Bottom line: it’s not much more attractive to own a house, but it does increase prices. According to research by Statistics Netherlands, the increase in house prices can’t be explained by a housing shortage. This probably means that the tax system is one of the drivers of the increase in housing prices.

Possible solution

If wealth were to be taxed more, there would be lots of benefits. In the current situation, investing your capital is a favoured way of saving: according to Jacobs, this system costs 35 billion euros per year in comparison with the situation in which houses and pensions were to be taxed the same as regular savings. To put this amount of money in perspective: this is the total amount invested yearly in our education system. If we were to use this money to benefit the tax payer, all brackets of income taxes could be decreased by 9 percentage points. However, home owners have an incentive to uphold the current system. Whether this change becomes reality, is hard to predict.