Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
and economic freedom

Taxation in Netherlands compared to other European tax systems

by ,

Taxation in Europe - Yearbook 2013


The big picture

Dutch fiscal policy has recently been designed predominantly to speed up fiscal consolidation and to reduce public deficits. This takes place amidst a recession in 2012, where Dutch GDP shrank by 1.3%, after slightly positive yet very low growth in 2011. The fiscal deficit is expected to be at 3.3% of GDP in 2013. It would therefore be an extreme exaggeration to speak of austerity policies in the Netherlands, but in the current volatile framework of the Eurozone crisis, where interest levels can increase quickly if bondholders lose confidence in a country’s ability to service its debt, the Dutch are also cautious enough to refrain from uncontrolled deficit spending. For Dutch private households, declining property price levels in combination with high levels of private debt have been a problem. Households in the Netherlands are heavily invested in property, and also suffer from declining real wages with inflation rates slightly above the Eurozone average.

Given this mostly pessimistic macroeconomic outlook and an emphasis on shortterm fiscal consolidation, a proposed reduction of the top corporate income tax rate from 25% to 24%, which featured prominently in the Dutch government’s 2011 tax policy paper, has not been enacted. Due to fiscal motivations, the general tendency has been more in the direction of tax rate increases, which of course may result in problems for the Netherlands’ long-run growth prospects. Nevertheless, the Dutch have so far preferred to consolidate through revenue increases rather than decreases in public spending, which to the contrary has still increased to a small extent in 2012. For the coming years, the new grand coalition government does however also plan substantial spending cuts, in particular in social transfers and development aid. The regular pension age gradually increases from 65 years today to 67 years in 2024. Attempts to cut the budget had earlier led to a demise of the former centre-right government, as the party of rightwing populist Geert Wilders refused to support budget cuts, which he denounced as having been imposed by Brussels.

Specific recent tax changes

The regular VAT rate has been raised from 19% to 21% in October 2012, due to budgetary needs. The lower VAT rate remains at 6%. A special arrangement has been made for the VAT on performing arts and on the import on antiquities. This rate was originally supposed to rise from 6% to the regular rate, but this particular planned increase has eventually been repealed. The VAT change is expected to generate an additional revenue of €4 bn overall. Some specific consumption taxes, e.g. on tobacco, soft drinks and also alcohol, have also been increased.

Also, the rate of the insurance tax is doubled, to 21%.

In the income tax, the regular top tax rate is reduced from 52% to 49% according to the 2013 tax plan. The top tax rate on imputed incomes from owner-occupied housing has on the other hand substantially increased, as the imputed income is now raised from 0.55% to 1.30% of property values above €1 million, and is planned to increase even to 2.30% in 2016. Also in the income tax, the deductibility of commuting costs has been considered for abandonment, which would have led to significantly higher tax burdens for some commuters. These plans have however been repealed in the 2013 tax plan. The deductibility of interest payments of mortgages has been restricted. On the other hand, the property transfer tax for owner-occupiers has, at first temporarily and now permanently, been reduced from 6% to 2%, in an attempt to increase the number of transactions on an ailing property market.

The Netherlands has also introduced a new bank tax. This new tax has been advertised as a reaction to the rescue of banks by the Dutch government: The participation of the financial sector itself in financing these rescue efforts, which have led the taxpayer to inject roughly €40 bn into Dutch banks, has been a popular talking point all over Europe, and also in Dutch politics prior to the introduction of the new tax. It does, however, also serve the more immediate purpose of compensating for the revenue loss from the reduction of the property transfer tax. The government expects the new bank tax to generate around €600 million in revenue. Subject to the tax are all legal entities that either have a Dutch banking license, or operate in the Netherlands and have a foreign banking license.

In addition to the revenue objective, the bank tax is also supposed to provide incentives for banks to reduce risky positions in their balance sheets. This is achieved by using – roughly – the unsecured debt position in a bank’s balance sheet as the tax base. The tax rate on long-term debt, which is to be redeemed in one year or more, is 0.022%, and is doubled for short-term debt with a maturity of less than one year. The focus is therefore less on the risk of the individual debt position (long-term debt does obviously not systematically increase in risk when it comes closer to maturity), but rather on the risk of the overall debt structure. Furthermore, a bank is fiscally punished if it pays a bonus to its management that is considered too high, from an economically arbitrary and purely political point of view. In particular, a bonus that exceeds 100% of the fixed salary leads to a multiplication of the normal tax rates with a factor of 1.1. The tax thus increases the incentive for banks to transform bonus payments into fixed contractual payments.

Clearly, it is doubtful that a micromanagement of banks’ payment structures by the government is helpful in any economic sense. This part of the bank tax probably owes more to political symbolism than to economic reason. More importantly, the Dutch Central Bank has also warned that the bank tax may have other unintended consequences. A significant reduction of borrowing by Dutch banks is expected, with clearly adverse macroeconomic effects. Furthermore, banks that are taxed on their balance sheets and thus strapped of liquidity regardless of their profit level may find it difficult to increase their share of equity quickly, and thus run into problems reaching the equity levels demanded by Basel III regulation.

The Netherlands at present does not intend to follow EU proposals for a financial transactions tax. The Dutch bank tax can be interpreted as a substitute for a transactions tax, at least in a political sense, since it meets the popular demand for a levy on the financial sector. The tax may thus be justified in terms of political strategy: It helps to avoid the transfer tax as an economically greater evil, associated with higher tax wedges. In terms of traditional normative tax theory and the benefit principle, it is however difficult to justify. The support of banks by the government took place in the form of loans and equity, not as subsidies. At present, no substantial definitive costs have emerged for the Dutch taxpayer.

Another controversial instrument of recent Dutch tax policy is a one-off crisis levy, which had been decided upon in 2012, as part of the budget compromise after the collapse of the centre-right coalition. This crisis levy was originally due to be paid in April 2013, but is still the subject of intense legal discussions. The crisis levy is to be paid on the fraction of wages that is considered to be "excessive" by policymakers. In this case, a levy of 16% on all individual wage income above €150,000 per year is to be paid by employers. Since the levy is designed to be retroactively applied to 2012 wages, in a way that does not give taxpayers any chance to adjust their behavior to the tax, it may be violating basic EU law and could be successfully challenged in court.

Further discussion

The Netherlands still enjoys a status as a tax haven for multinational corporations. In particular, Dutch tax law and double taxation agreements facilitate constructions such as the notorious "Double Irish with a Dutch Sandwich" that can significantly reduce the tax burdens of multinational corporations, in some instances to almost zero. Pressure to change the status of the Netherlands as a de facto tax haven for these companies is coming not only from foreign governments, but somewhat surprisingly also from the Dutch public itself, since the newspaper De Volkskrant revealed in its January 12, 2013 issue that about 100 multinationals have routed roughly €57 bn through the Netherlands in 2011 alone. There are no concrete policy proposals so far, but it remains to be seen whether internal and external political pressures will lead to a tax regime change in the future.

Summary and Discussion

Dutch policymakers appear to be somewhat undecided what the rational response to the current macroeconomic problems and the related issues on the financial markets is. A different explanation for the lack of coherence in fiscal policy may be the grand coalition government, which requires broad and sometimes unorthodox compromises. In any event, current fiscal policy in the Netherlands is to some degree self-contradictory. There is a willingness to reduce budget deficits, but a political will to enforce substantial spending cuts is missing – the share of public spending relative to GDP has been above 50% in 2012.

Similarly, a general insight that the economy would benefit from lower tax rates is there, and reflected in the decrease of the top rate in the income tax. Nevertheless, political symbolism and a strong emphasis of distributional issues in the political debate lead to inefficient or even illegal tax innovations such as the bank tax and, in particular, the one-off crisis levy. A more comprehensive tax reform, in particular a simplification of the very complicated Dutch income tax associated with a substantial reduction of tax burdens, is at present not in sight.

Jan Schnellenbarch, PD Dr.
Ruprecht-Karls-Universität Heidelberg
Alfred-Weber-Institut für Wirtschaftwissenschaften
and Walter-Eucken-Institut, Freiburg im Breisgau

This is part of :

Taxation in Europe - Yearbook 2013
The yearly report on the evolution of European tax systems

A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
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