Strange Moments in Dutch Taxation

When I write about how we can learn by examining tax policy in other nations, it’s normally because there’s an important policy lesson.

• It’s unfortunate to have an income tax.
• Adopting a VAT leads to bigger government.
• Wealth taxes are extraordinarily destructive.
• Class-warfare taxes don’t raise much revenue.

Sometimes, however, I share foreign examples simply because they are odd.

Consider these excerpts from a report by Charlotte Gifford in the U.K.-based Telegraph. It seems that the Netherlands had a very unusual way of double-taxing income that was saved and invested.

The Netherlands is expected to pay billions of pounds in compensation to taxpayers after a divisive levy on investments and second homes was shot down by the Dutch Supreme Court. On 6 June, the court ruled that the country…went against the European Convention on Human Rights because it forced savers and investors to pay tax on income they had not earned. The decision has opened the door to legal redress for hundreds of thousands of people who were overcharged by the tax authority…based on fictional – rather than actual – returns. …the government assumed that everyone earned a 4pc return on their assets. Taxpayers were then charged 30pc on that yield. This was regardless of whether they held cash, stocks or property and regardless of how their investments performed. …Savers were effectively punished for holding their money in low-interest accounts, with many forking out more in tax than they earned from their wealth. As a result people were charged effective tax rates of 100pc or more.

As you can see, this approach sometimes led to absurdly high tax rates.

For example, the Dutch government would assume that a household with $100,000 of assets would have $4,000 of earnings. It would then grab $1,200 of taxes.

But what if, in the real world, that household had the money in a bank account paying 1 percent interest. They would have to pay $1,200 of tax even though their earnings were only $1,000. That means a tax rate of more than 100 percent.

Or what if the household had money invested in the stock market and it was a bad year, meaning they lost money or maybe broke even. The government would still demand $1,200 of tax even though there were no earnings. That’s means a tax rate for higher than 100 percent. Infinite!

Barack Obama and Francois Hollande would be delighted.

To be fair, this strange system also could mean low tax rates. With the right (smart of lucky) investments, a household with $100,000 of assets might have earnings of $20,000. So a tax of $1,200 would mean a tax rate of 6 percent.

The bottom line if that this approach meant very high tax rates on people when financial markets were weak (or on people who were bad/unlucky investors). But very low tax rates when financial markets were strong (or on people who were good/lucky investors).

Ideally, there should be no double taxation. So if people save and invest their after-tax earnings, there should be no additional layers of tax when they get interest, dividends, or capital gains.

If the ideal policy is not possible, the goal should be the lowest-possible rates on productive behavior. And if such taxes have to exist, it makes sense to tax actual returns rather that assumed returns.

P.S. Some tax rates in the Netherlands are far too high.

P.S.S. Notwithstanding punitive income taxes, the Netherlands is a reasonably sensible nation by European standards. For instance, it has private Social Security and school choice.