Measure
An exemption threshold of € 16,300 for income tax and national insurance contributions300 (Old Age Pensions Act,301 Dependants Benefits Act302 and Exceptional Medical Expenses
300 In Dutch: Premies Volksverzekeringen (PVV). 301 In Dutch: Algemene Ouderdomswet (AOW). 302 In Dutch: Algemene Nabestaandenwet (Anw).
(Compensation) Act)303 would cost about € 24.2 billion. This exemption replaces the current system of tax credits304 and will not be means-‐tested. Employees who have multiple employers qualify for the exemption only once.
Purpose
-‐ To reduce the tax burden on labour for employees. -‐ To compensate for higher consumer taxes.
-‐ To simplify the tax system.
-‐ To reduce the administrative burden for employers.
Effect for employers and consumers
The exemption primarily entails a tax break for consumers. Based on income distribution in the Netherlands, approximately 800,000 income earners will no longer have to file tax returns for income tax and national insurance purposes. This would result in a considerable simplification of the tax system and a reduction in the overall administrative burden.
A secondary effect is that employers will no longer be required to keep tax and national insurance records for these employees. Given this considerable reduction in administrative burden for employers, it will become more attractive for them to hire people. This secondary effect will benefit employers with staff at the lower levels of the income spectrum.
Underlying assumptions
The costs of this measure are based on available Statistics Netherlands (CBS) data relating to income classes (for the year 2011),305 tax credits (2013),306 tax brackets (2013)307 and the number of persons earning an income from employment, business activities, or secondary income (2011).308 The number of persons earning an income under the exemption threshold is so high that a small adjustment in level has a relatively large impact on the scope of the scheme.
The exemption does not apply to the Health Insurance Act309 because total revenue from means-‐tested health insurance contributions (€ 22.7 billion)310 is so high that the introduction of a general tax exemption for the Health Insurance Act would result in excessive costs. In section 6.1.6, we do, however, foresee a reduction in the employer-‐paid contribution to means-‐tested health insurance contributions. Section 6.1.5 provides an overview of the current situation and the new situation where income tax, national insurance contributions and employed persons' insurance contributions are concerned.
303 In Dutch: Algemene Wet Bijzondere Ziektekosten (AWBZ).
304 The general tax credit, earned income tax credit, newcomers tax credit, earned income tax credit for continuing to work longer, life-‐course special leave tax credit, child credits, combination tax credits, single-‐parent's tax credit, parental leave tax credit, elderly person's tax credit, young disabled person's tax credit and tax credits for investments. This study is based on the tax credits in force in 2013 (and some that were in force in 2009). 305 CBS (2013) Inkomensklassen; particuliere huishoudens naar diverse kenmerken.
306 Belastingdienst (accessed July, 2014) Algemene heffingskorting. 307 Belastingdienst (accessed July, 2014) Overzicht tarieven en schijven.
308 CBS (2011) Inkomensklassen; particuliere huishoudens naar diverse kenmerken. 309 In Dutch: Zorgverzekeringswet (Zvw).
310 Rijksoverheid (2013) Rijksbegroting 2013. Voorbereiding, Begroting, Vaststelling begroting Ministerie van Volksgezondheid, Welzijn en Sport (XVI) voor het jaar 2013.
Area of concern Solution
A strict separation between persons earning an income above or below the exemption threshold will discourage them from gainful employment; putting in extra hours of labour will lead to a more than proportionate tax burden.
In the current system, marginal revenues from labour are already negative in some cases.311 Given this situation, the solution should lie in a package of means-‐oriented complementary policies.
Citizens stay outside the reach of the tax authorities when they are no longer required to file tax returns. These citizens are unable to capitalise on available tax credits (this is also referred to as the ‘capitalisation problem’).
Expectations are that the exemption threshold will effectively reduce the scale of the capitalisation problem. Because of the nature of the exemption, people earning an income below the threshold will no longer pay tax, so that the income policy in the form of allowances can possibly be phased out.
6.1.2.
Exemption from employed persons' insurance
contributions
Measure
Employees earning less than € 16,300 will be exempt from employed persons' insurance contributions.312 Although the tax base for the contributions will not change, the contribution rate will be set at zero percent up to the amount of the exemption threshold.313 The costs of this measure, € 191 million, will be apportioned to income from employment above the threshold, so that total state revenue will remain the same.
The contributions are levied based on the uniform wage definition.314 Benefit rights do not change, meaning that maximum benefits will be kept at the current level. The tax reduction is designed for persons earning an income up to the threshold; the scheme would be too costly if it were to apply to all classes of income earners. That is why the scheme has to be restricted.
Purpose
-‐ To reduce the tax burden on labour (at the lower levels of the income spectrum) for employers.
-‐ To simplify the tax system.
-‐ To reduce the administrative burden for employers.
Effect for employers and consumers
Under the current system, employed persons' insurance contributions are fully paid by employers. This measure favours persons earning an income below the exemption threshold; it will become more attractive for employers to hire persons falling in this group. Employers of
311 European Commission (2013) Tax reforms in EU Member States. Tax policy challenges for economic growth and fiscal sustainability.
312 In Dutch: Premies werknemersverzekeringen (pwn).
313 Income from € 0 to € 50,853 was subject to national insurance in 2013. Belastingdienst (accessed July, 2014), Hoe betaalt u mee aan de premies werknemersverzekeringen?
314 The Uniform Wage Definition Act came into effect on January 1, 2013; under this Act, the tax base for employed persons' insurance contributions was equated to that for statutory payroll tax. The permitted exemptions were also abolished as of January 1, 2013. EY (2012) De Wet uniformering loonbegrip per 1 januari 2013. Fiscaal Praktijkblad, nr. 17.
persons earning an income above the threshold will pay about 0.33 percent more in employed persons' insurance contributions.
Underlying assumptions
The most recent Statistics Netherlands (CBS) data available (for the year 2011) were used.
Section 6.1.5 provides an overview of the current situation and the new situation where income tax, national insurance contributions and employed persons' insurance contributions are concerned.
Area of concern Solution
A strict separation between persons earning an income above or below the threshold will discourage them from gainful employment; putting in extra hours of labour will lead to a more than proportionate tax burden.
In the current system, marginal revenues from labour are already negative in some cases. Given this situation, the solution should lie in a package of means-‐oriented complementary policies.
6.1.3.
Allowance for post-active persons
Measure
Post-‐active persons (retirees) – and those with a small pension in particular – will be hit especially hard by an increase in the reduced VAT rate (see section 7.1.1) because they cannot be recompensed through any exemptions. After all, post-‐active persons do not pay statutory payroll tax in the current system. An allowance of about € 2.3 billion in total will compensate post-‐active persons for the increase in the reduced VAT rate of 6 to 22 percent.
Purpose
-‐ To compensate for higher consumer taxes.
Effect for employers and consumers
The measure will benefit consumers.
Underlying assumptions
Allowance was made for 3.1 million post-‐active persons in total and for the difference in state old-‐age benefits for married and unmarried persons, as reported by Statistics Netherlands (CBS) December 2012.315 The costs of the measure have been calculated for all post-‐active persons and up to the level of state old-‐age pension benefits.
The assumption underlying the cost calculations for this measure was that post-‐active persons receiving state old-‐age pension benefits spend half of their benefits on VAT-‐taxable products; the other half is spent on non-‐taxable products (such as rent, medical expenses and healthcare contributions). It was then assumed that eighty percent of their taxable consumption is spent on products subject to the reduced VAT rate and twenty percent on products subject to the regular rate.
Area of concern Solution
There are post-‐active persons commanding an income far above the level of state old-‐ age pension benefits. The measure does not have much of an effect for them.
It could be considered introducing an income cap for such recipients.
6.1.4.
Allowance for inactive persons
Measure
Inactive persons316 whose income from labour and/or secondary income is lower than € 5,400 do not pay income tax and national insurance contributions in the current system because of the general tax credit.317 Similar to post-‐active persons, they will be hit especially hard by an increase in VAT rate because they cannot be expected to be recompensed through any exemptions. An allowance of about € 24 million will compensate inactive persons earning less than € 5,400 for an increase in the reduced VAT rate of 6 to 22 percent (see section 7.1.1).
Purpose
-‐ To compensate for higher consumer taxes.
Effect for employers and consumers
The measure will benefit consumers.
Underlying assumptions
This measure concerns a vulnerable group of about 65,000 people (data 2011)318 who are estimated to spend ninety percent of their income on products subject to the reduced VAT rate and ten percent on products subject to the regular rate.
Area of concern Solution
There are inactive persons who have only a small income from labour and/or secondary income, but enjoy significant other forms of income. The measure does not have much of an effect for them.
It could be considered introducing a means test or asset test in Income Boxes 2 and 3.