How the tax system is being made to work for the wealthy

Fondsnieuws
Erasmus School of Economics

In an article by Fondsnieuws, Peter Kavelaars, Pofessor of Economics of Taxation at Erasmus School of Economics, explains the ways in which wealthy people use the tax system to pay much less tax. He also gives his opinion on the initiative to tax income from wealth.

The distribution of wealth in the Netherlands is becoming increasingly unequal: the richest 10 percent of the country now owns 61 percent of its wealth. This is partly due to the tax legislation, in which income from capital is taxed more favourably than income from employment. State Secretary of Finance Van Rij wants to try to make this more equal. According to professor Kavelaars, it is a good thing that the income from capital is taxed instead of the capital itself: 'If you were to tackle the capital purely and simply, you would be taxing twice. From an economic point of view, that is completely wrong. On the other hand, it is a good thing if you tax income from employment and income from capital more equally.'

Current inequality

For wealthy individuals, it is possible to use the rules that apply in Box 2 to shift the tax backwards. The majority of the Netherlands builds up capital in box 1, where the rates are higher. Kavelaars mentions a number of tricks that can be applied in Box 2: by making smart investments, untaxed capital can be built up. In this way, an entrepreneur pays out little, but it is possible to take out loans that can be used cleverly to achieve a high return using other tax legislation. For example, buildings can be purchased that can be rented out: the income from these is not taxed and the capital gain on sale is also untaxed. If the entrepreneur pays the mortgage on his own home, the entrepreneur receives mortgage interest deduction.

Risk aversion

Kavelaars: 'Against this background, it is also reasonable to tackle the substantial interest. At the time, we also advocated this in the van Dijkhuizen committee. The fact is that this is hardly ever taxed in Box 2. Virtually no one takes dividend out of the company. It is passed on, with a view to business succession and building up investment capital. Moreover, the corporate income tax is low. This way, one can save for decades in a private limited company. Although all this is known to the Ministry of Finance, it will take few shocking measures to really tackle this. The ministry wants to know exactly what the consequences of certain measures are before it takes action. Kavelaars states that the ministry is very risk-averse.

Professor
More information

You can download the article from Fondsnieuws, 1 August 2022, above.

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