How can we effectively compensate for the decrease in purchasing power?

De Telegraaf
Peter Kavelaars, Professor of Fiscal Economics at Erasmus School of Economics
Erasmus School of Economics

A while ago, the government indicated that it wanted to look at ways to soften the blow that purchasing power takes. The question is, how can this best be achieved? In an interview with De Telegraaf, Peter Kavelaars, Professor of Economics of Taxation at Erasmus School of Economics, considers a number of options.

Firstly, it must be stressed that this operation is much more complex and large-scale than is usually the case. It therefore also involves major political choices: who should primarily benefit from the measures? The approach is highly dependent on these preferences, Professor Kavelaars also points out: 'The crucial question is: do you want to compensate everyone or only the lower-income groups?'

Different possibilities

There are a number of tax options: adjusting VAT, adjusting income tax or adjusting the system of allowances. It will probably not be possible to implement adjustments this year. Kavelaars is not in favour of adjusting VAT or surcharges, for various reasons. Kavelaars: 'We all know where an increase in VAT will end up. And we know where a reduction in VAT ends up as well. These are not the same groups. Often, the VAT is then pocketed by parties with market power', such as supermarkets. The benefits system is already so complex that there is no point in tinkering with it now. The third option, income tax, may be interesting: 'Give everyone up to an average income a tax cut. People with very low incomes then get money back from the tax authorities'. According to Kavelaars, this is feasible, as it easily fits in with the current way of levying taxes.

Peter Kavelaars, Professor of Economics of Taxation
More information

You can download the full article from De Telegraaf, 24 August 2022, above.

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