'A fundamental reform towards an efficient and fair tax regime is needed'

NRC
Erasmus School of Economics

Higher taxes on capital and lower taxes on labour is a common view among political parties in the coming elections. According to Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, this is a good idea. In an article by Dutch Newspaper NRC, he explains why.

Economically efficient?

According to Jacobs, the economy is seriously distorded by the frequent non-taxation of capital gains, generous tax subsidies on capital accumulation through houses and pensions, taxation on fictitious rather than real returns, sometimes flat and sometimes progressive taxes, and strong financial incentives for debt accumulation. Moreover, the current tax system would not redistribute income and wealth in an economically efficient manner. ‘The low tax burden on capital causes the tax burden on labour to be too high. It would be more efficient to tax all capital income uniformly with a combined capital gain tax rate of around 25 to 30%,' Jacobs explains. By reducing the tax subsidies on own homes and pensions, the tax burden on labour income can be significantly reduced.

Higher taxes on houses

This would make the tax system more efficient and the Dutch economy less fragile, Jacobs believes. However, according to Raymond Gradus, Professor of Public Economics at VU Amsterdam, raising taxes on own homes and pensions will cause problems with the transition to the new pension system and the construction of new homes. In addition, the proposed scheme would cause problems for young homebuyers. Jacobs emphasises that the tax incentives to promote home ownership are rather pointless. ‘In the Netherlands, the supply of houses hardly reacts to price increases. Those incentives therefore mainly lead to further price increases and not more home ownership. It is not first-time buyers who benefit, but existing homeowners. Most economists are in favour of higher taxes on houses, not lower ones. That is much more efficient than taxes on income or profit.’

A financially vulnerable country 

According to Jacobs, subsidies on capital accumulation discourage hard work and entrepreneurship. By not taxing one's own home and pension accrual like savings, all tax rates are about 9 percentage points higher. ‘Due to the tax authorities, the Netherlands is becoming more financially vulnerable since huge mortgage debts are being built up and assets are being trapped in pension funds,' Jacobs says. According to Jacobs, the constant fiddling with taxes must stop. A fundamental reform towards an efficient and fair tax regime on capital income is needed.

Professor
More information

The full article from NRC, 14 March 2021, can be downloaded above (in Dutch).