Rich get richer as Dutch tax system widens income disparities
Rich people in the Netherlands are only getting richer. The Dutch tax system fails to address economic disparities between households and, in some cases, Dutch taxes are even widening the gap between rich and poor, the Bureau for Economic Policy Analysis (CPB) said in a report on Wednesday.
Between 2011 and 2019, the wealthiest 0.01 percent of households’ income increased by over 70 percent, while nearly everyone else saw their income increase by between 4 and 8 percent. In that same period, the share of income held by the top 1 percent richest households in the Netherlands increased from 12 to 15 percent.
The CPB warns that the widening gap is putting equality of opportunity under increasing pressure. Children’s opportunities, income, and assets are increasingly determined by the family they are born into. “If opportunities are increasingly determined by where one is born, this is detrimental to prosperity,” the CPB warns. Part of society has too few opportunities to reach their full potential, and the risk of economic concentration of power increases. When that happens, “political influence can be used to serve vested interests rather than to stimulate broad prosperity.”
On paper, the Dutch tax system seems to address these disparities. Highest earners pay the most tax in theory. But in practice, the highest earners pay significantly less tax than the income group below them, because the wealthiest people have more opportunities to reduce their tax burden.
For example, some taxes can be deferred for a long period, and tax regulations allow the wealthy to earn more on their assets. For example, on paper, the concentration of wealth at the top is curbed by inheritance and gift taxes. But in practice, these are infrequently taxed because a large portion of inheritances and gifts falls within tax exemptions.
The CPB also warned that tax schemes like pension benefits and the mortgage interest deduction are creating differences in tax burden within the middle class. As a result, households with comparable gross income have large differences in net income. For example, homeowners have more to spend than tenants with the same gross income because the mortgage interest deduction allows homeowners to deduct part of their housing costs, the interest they pay on their mortgage.
“Adjustments are necessary to prevent the tax system from further contributing to the increase in economic disparities and thereby undermining economic prosperity,” the CPB said.
Experts have been advocating for abolishing the mortgage interest deduction for years, though the current Cabinet promised to leave it unchanged at the VVD’s insistence. The government is also struggling to reform the wealth tax system in Box 3.
According to the CPB, how much inequality is acceptable and to what extent the tax system redistributes wealth are issues the government and parliament must decide on. But it adds: “By abolishing these schemes and reducing unnecessary deferral and arbitrage options, a more efficient system is created and, if desired, a more equal distribution.”
“The released funds can be used to focus on supporting less privileged families, so that they can still develop their talents. This ultimately benefits overall prosperity.”
