Aart Gerritsen, Associate Professor at Erasmus School of Economics, raises serious objections to VNO-NCW’s call to switch to a realisation-based capital gains tax in Box 3. ‘VNO-NCW is dead wrong here,’ the economist says.
The fallacy behind the call for a capital gains tax
The largest employers’ organisation in the Netherlands, VNO-NCW, argues that taxing unrealised gains in Box 3 is economically unwise and advocates taxing gains only upon realisation, which, according to the employers’ organisation, would be more favourable for both investors and the public purse. Gerritsen argues that this is a nonsensical conclusion based on a nonsensical assumption: ‘VNO-NCW implicitly assumes that the government itself invests and borrows at 0% and therefore also discounts at 0%. Investors, by contrast, do earn a positive return. In that case, it is hardly surprising that the government would prefer to levy taxes later. This gives investors a bit more time to earn a positive return; something the government itself, by assumption, cannot do. A realisation-based capital gains tax is levied later than an accrual-based capital gains tax, and therefore suddenly appears more favourable.’
‘The assumption is completely nonsensical,’ Gerritsen continues. ‘Of course the government also earns a positive return on its tax revenues. After all, these revenues can be used to pay down debt (= lower future interest expenditure), reduce taxes (= more resources for households, which can then earn a positive return), or invest directly in public goods or financial assets.’
Economic arguments for an accrual-based tax
According to the economist, a better and more plausible assumption is that the government can earn roughly the same (risk-adjusted) return as investors. ‘What you then find is exactly what economists have been saying for decades: in the absence of behavioural effects, a realisation-based capital gains tax and an accrual-based one are perfectly equivalent. Once behavioural effects are taken into account, an accrual-based tax is actually better for the economy,’ Gerritsen says.
A realisation-based capital gains tax, Gerritsen argues, can be partly avoided by postponing realisation. ‘This is not possible with an accrual-based tax. For a given level of wealth, an accrual-based tax therefore leads to higher tax revenues. Alternatively, at a lower rate, it leads to higher wealth for the same level of tax revenue.’
The note by VNO-NCW, which questions the current legislative proposal, has led in the House of Representatives to a motion by five parties calling for new calculations of the tax revenues.
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For more information, please contact Ronald de Groot, Media & Public Relations Officer at Erasmus School of Economics: rdegroot@ese.eur.nl, +31 6 53 641 846.
