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Flat but fairTable of ContentsExecutive Summary Flat but fair4 4. Flat but fairExecutive SummaryThis paper advocates the introduction of a flat rate incometax in the Netherlands. Such a system would lead to a betterfunctioning labour market and fewer administrative costs foremployers. Progressivity would be achieved through taxcredits at the household level. By itself, a flat rate tax usuallyhas adverse distributional effects. However, if we allow theincome-dependent health care contribution also to be givena flat rate, the distributional effects would be substantiallyless significant.
This paper further gives somerecommendations for lowering the flat tax rate by shiftingaway from income taxes, increasing value-added taxes andbroadening the tax base. It concludes by showing that amarginal tax rate plus social security contributions of The focus of this proposal is theNetherlands, but several aspects of it may be relevant toother EU Member States.
Flat but fairIntroductionAs in other European countries, in the Netherlands there hasbeen an ongoing debate about introducing a flat rate tax onincome. In addition, the tax reform of substantiallyreduced the tax rates on labour incomes. The basic tax ratewas decreased by 1. Moreover, the EarnedIncome Tax Allowance was converted into an EmploymentTax Credit which, for earners of low wages, wasconsiderably higher than the Earned Income Tax Allowance,thereby lowering the replacement rate Gradus The introduction of a flat rate system is seenby many economists as a reform that can boost efficiency,employment and growth through simplification and betterincentives.
At the same time, inequality is expected toincrease in Western countries for the Netherlands seeJacobs et al. Flat but fair; and for Germany see Fuest et al. As will be shown in this paper, introducing a flatrate income tax in combination with a flat rate health carecontribution results in minimal overall inequality.
In this paper we describe this proposal in more detail. First,we discuss the implementation of the flat rate in severalEuropean countries, especially in Eastern Europe. Inaddition, we present the ongoing debate in the economicliterature of a flat tax rate in other European countries. Second, we explain the current Dutch tax system, which isflatter than one might expect. Third, we explore the Dutchsocial security system and its relation to the tax system. Fourth, we clarify the health care system, with specialattention to the health care reform of Fifth, we detailproblems with the current income tax system, in particularthe high administrative burden.
Sixth, we describe theproposal for a flat rate in more detail, focusing on theincome effects of this new system. Finally, we provide someconclusions. The mainfeatures of each are summarised in Table 1, which is basedon an overview by Keen et al. Here, we focus on theintroduction of flat rates in Europe and on income tax reform. Table 1: The introduction of flat rates in Europe rates in per cent Flat rate Rate Rate after Rate in Basic adopted before AllowanceEstonia 16—33 26 22 Modest increaseLithuania 18—33 33 27 Substantial increaseLatvia 25 and 10 25 25 Slight reductionRussia 12—30 13 13 Modest increaseUkraine 10—40 13 15 IncreaseSlovak Rep.
Keen et al. Flat but fairIn their analysis Keen et al. There are other significant structural differences betweenthese flat tax reforms. In Estonia, Latvia, the Slovak Republicand Romania, when the flat tax was adopted the rate of theincome tax was set equal to the rate of the corporateincome tax CIT.
The merit of equating these two rates isthat it removes the tax distortions that occur when taxpayerschoose between conducting an activity in corporate form oracting as individuals. Moreover, Table 1 shows thatexcept in Latvia and Georgia, adoption of the flat tax hasbeen associated with an increase—in some cases quitesubstantial—in personal allowances or general tax credits ;evidently, the motive is to limit the increase in the tax burdenfor the less highly paid.
However, these measures to protectthose on lower incomes are relatively costly. Therefore,according to Keen et al. Interestingly, improved compliance in Russia seems to havebeen enough to offset the effects of rate reductions in the2 In this table the first eight are in italics.
Flat but fairupper income ranges and of increased basic allowances. We turn now to the distributional effects. In order to achieverevenue neutrality, several of these income tax reforms havebeen accompanied by changes in base-broadening or bythe implementation of other taxes such as excise tax or VAT. The distributional impact of the income tax, considered inisolation, is therefore of little interest: what ultimately mattersis the distributional impact of the tax and benefit systemconsidered as a whole.
However, empirical studies showthat the distributional effects of movement toward a flat taxare not straightforward: reforms that involve an increase inthe basic tax-free amount benefit both the lowest and thehighest earners, and compliance effects and base-broadening may in themselves lead to an increase ineffective progressivity.
There is thus no general consensusthat movement to a flat tax in itself implies a reduction inprogressivity; in fact, the commonly used summary indicesof progressivity, reflected in the few studies of this issue,show an increase in progressivity Keen et al. Except for Russia and the Slovak Republic, thereseems to be no analyses of tax reform based on incomeeffects at a household level. However, there are somesimulation studies in other European countries along similarlines, even though a flat tax has not yet been implemented inthese countries see Jacobs et al.
The overallconclusion of this literature is that a low flat tax rate and a lowbasic allowance yields positive welfare effects and boostsemployment and growth through simplification and betterincentives. At the same time, however, inequality is expectedto increase. The increase in income inequality can be avoided10 Flat but fairby combining a higher tax rate with a higher basic allowance.
But in this case, the efficiency gain vanish. Therefore, it isimportant to investigate a flat tax rate proposal for theNetherlands that does not increase the general tax credit forevery person but generates alternative revenue through socialsecurity or health care contributions. In the followingparagraphs we first describe the Dutch tax, social securityand health care system and then present the proposal. The Dutch Tax SystemThe Dutch income tax system that has been in place since has three distinct income categories, each with its owntax tariff.
Box I containsincome from labour and housing. While the tax system is in principle individualised, itsindividual character does not apply to the general tax credit. In particular, non-participating partners in couples cantransfer their credit to their working spouses. Beyond this level, a piecewise linear tax structure applies,3 In most cases the taxable income is the income from current or previous work plus theimputed gain from homes owned 0.
In addition, there can be deductions for gifts and training costs. Flat but fairwith rates ranging from Taxpayers over the age of 65 are notrequired to pay state old-age pension contributions andtherefore face a tax rate in the first two brackets of In Box III there is a flat tax of1.
Moreover, an annual tax credit of 1. This credit counts only towards Box III. The Dutch SocialSecurity SystemIn the Netherlands the social security and tax systems areclosely related, as the overall tax rate of the first two incomebrackets contains several social security contributions seealso Table 2. Furthermore, employer contributions todisability and unemployment funds are collected by theDutch tax administration.
Werkgever Alert 2016
Reeds verschenen nieuwsbrieven zijn beschikbaar en kunnen worden nagelezen op Verschenen nieuwsbrieven. This newsletter provides information to employers, hr-professionals and other interested parties with respect to recent developments and jurisprudence in the field of employment taxes. Past issues of this newsletter are available and can be read on Past newsletters. Ontbreken handtekening op loonbelastingverklaring leidt tot toepassing anoniementarief. A payroll tax statement without a signature leads to the anonymous tax rate.