Van Dijkhuizen Committee: lower tax rates with a very long first bracket, fewer tax deductibles and simpler benefits will lead to more jobs
The Van Dijkhuizen Committee advises the government to opt for an improved tax system with lower rates and a very long first bracket, fewer deductible items and simpler benefits. According to the CPB Netherlands Economic Bureau for Economic Policy Analysis, these structural reforms will lead in the long run to some 140,000 new jobs, while the average effects on income are limited. At the beginning of 2012, the committee was instructed to explore scenarios to arrive at a simple, sound and fraud-resistant tax system that would help improve the competitiveness of the Netherlands. The report was presented to the State Secretary of Finance Frans Weekers by chairman Kees van Dijkhuizen on the 17th of June 2013.
Kees van Dijkhuizen: ‘If these recommendations are adopted, it will be possible to create a simpler, improved system of taxation and benefits, a system that will also help maintain the tax ethics of Dutch taxpayers, which are generally good. The vast majority of the population is willing to pay taxes if they are perceived as reasonable. Our proposals will raise the upper end of the first bracket from around € 20,000 to more than € 60,000. This will put 12 of the 13 million taxpayers into the first tax bracket. These structural reforms will also help improve the competitiveness of the Netherlands. I see our proposals for structural reform of the tax system as complementary to other important structural reforms this country is implementing in relation to pensions and the labour market, reforms which the European Commission is urging countries to make.’
Starting points: budget-neutral, with limited effects on income
The brief to the committee was to achieve the tax reform in a budget-neutral manner while endeavouring to keep the income effects small. It has managed to do both. The committee favours a distinction between income support in the form of benefits aimed at households and tax levy on an individual basis with a view to encouraging people to work. The committee made public a number of its proposals during the most recent formation of a new government. In this final report the committee presents the overall picture of changes to the present system of income tax and benefits.
Income tax: lower rates with a very long first bracket and fewer deductible items
The committee recommends a move from four to two tax brackets with rates of 37% and 49%. A rate of 37% will then be paid on a person’s income up to € 62,500. The number of taxpayers subject to the first tax bracket will double from just under six million to nearly twelve million, which is 93% of all taxpayers. One of the ways in which this will be financed is by eliminating or making changes to a large number of deductible items. These measures involve an amount of over € 12 billion in 2017, increasing to € 24 billion on a structural basis.
Simpler and more fraud-resistant system of tax benefits
The committee recommends that three benefits – the healthcare benefit, the rent benefit and the child-related budget – be combined and streamlined. This will make it easier for people to see what their take-home pay will be if they work more hours. It will also decrease the number of households receiving benefits by 1 million. Furthermore, with a view to combating fraud and for reasons of efficiency, the committee recommends no longer paying the healthcare benefit to individuals, but directly to their healthcare insurers. The total number of taxpayers in receipt of a benefit will then decline by around 70%, from 4.5 million to fewer than 1.5 million.
Lower fixed yield on assets in box 3
The committee furthermore recommends lowering the fixed yield of 4% in box 3. This yield is too far removed from what people actually receive in the way of income from their assets. The committee recommends that the fixed yield be based on the interest rate on savings deposits in the past five years, which would mean a level of 2.4% for 2014. The committee has found financing for an initial reduction to 3% in 2014.
Better balance in the treatment of owner-managers
The owner-manager lives in two worlds: he is an employee and he holds share capital. The committee recommends bringing the customary salary, which is determined by the owner-manager himself, more in line with that of a comparable employee in box 1. The committee also recommends introducing a fixed return in box 2 of 2.4% on assets, the same as in box 3. The effect will be that the tax for this group is moved forward, although not increased. The rate in box 2 after payment of corporation tax could be reduced from 25% to 20%.