October 24, 2012
In the Netherlands, a committee led by NIBC-CFO van Dijkhuizen (CvD) advises to take an integrated approach to reform the tax system. It proposes a more flatter rate of income tax and, thereby, a better functioning labour market. Moreover, it reduces mortgage interest deduction and thereby decreasing the vulnerability of the economy to rising interest rates or unemployment. I believe that this proposal should judged positively and should be on the agenda of current parties (i.e. liberals and social-democrats) which are negotiating a new coalition agreement as the flat rate also has been favoured by independent experts and opposition parties as Christian-democrats.
As in other European countries, in the Netherlands there has been an ongoing debate about an income tax reform. Interestingly, the committee proposes a flat tax rate of 37% for more than 90% of Dutch citizen and for those incomes above € 62,500 the committee propose to add an extra surcharge of 12%. Therefore, as a consequence the marginal rate will be limited to a maximum of 49%, including for top incomes. This proposal has many similarities by a proposal of the Research Institute for the CDA in 2009, where a proposal for a socially conscious flat rate tax in the Netherlands was advocated. It is well-known that such a tax reform can boost efficiency, employment and growth through simplification and better incentives.
Currently, the Netherlands adopts a progressive tax structure for personal income. In 2012, the system contains a general tax credit of 2,033 euros, a labour tax credit with a maximum of 1,611 euros and several other credits targeted to specific groups. Beyond this level, a piecewise linear tax structure applies, in 2013 with rates ranging from almost 37% to 52%. In order to achieve a balanced budget by a marginal flat tax rate on income of 37% for most citizens, a shift away from income taxes to value added taxes is proposed by the CvD committee. Compared with some other European countries, however, the Dutch standard VAT rate is relatively low. Furthermore, they propose to limit some tax reliefs, especially those aimed at single parents and self-employed persons. In addition, they propose that taxpayers over the age of 65 should pay state old-age pension contributions and pensioners with a low and middle income face a higher tax rate. Although, the income consequences of the CvD proposal are rather limited, this is thus not the case for pensioners with a small income. Therefore, in my view the current requirement that taxpayers over the age of 65 will not pay old-age contributions should be continued as otherwise the distributional aspects of this reform are too large.
In addition, the CvD proposal also deals with the Dutch housing market, which has presently come to a standstill, and the issue of high mortgage debt. Currently, Dutch homeowners can make unlimited use of their right to deduct interest on mortgages from their taxable income. Moreover, household wealth is taxed at 30 percent, so there is an incentive to take out the largest possible mortgage. This system has an adverse effect on the government’s finances, while, moreover, it stimulates household indebtedness, thereby increasing the vulnerability of the economy to rising interest rates or unemployment. The Stability Program –a political agreement between five political parties- in April 2012 goes some way by limiting interest deduction to new schemes that redeem the mortgage debt at a speed at least as high as that of an annuity scheme over a period of 30 years. However, a more substantial further reform of the Dutch housing market is needed and the CvD committee advocates a crucial role of the tax system. It suggests a flat rate for the deduction of mortgage and therefore reduces arbitrage between mortgage debt and wealth and limiting interest deduction also for current schemes. However, this further limitation is not worked out in the report and, therefore, creates uncertainty.