Optimal redistributive income tax in the Netherlands

Time: 2011, Tuesday February 8, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Floris Zoutman (CPB)

Discussant: Berthold Leeftink (EL&I)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject: In this paper we study the optimal non-linear redistributive income tax in the Netherlands. The optimal tax is a function of three ingredients: the distribution of earnings ability, the elasticity of taxable income and the welfare function of the government. By using data of about 90,000 individuals on their current income and marginal tax rate we estimate the Dutch ability distribution using the Saez (2001) inversion method. We use a kernel estimate for the main body of the distribution and estimate a Pareto tail. We find a Pareto parameter of 3.3 indicating a very thin tail of the ability distribution. In addition we calibrate our simulations to the standard elasticities reported in the literature and we consider both a Rawlsian and Utilitarian objective of the government. We conclude that the rate in the top bracket is set beyond the top of the Laffer curve and thus too high for any objective function of the government. In addition we find evidence that the average tax rate for middle-income earners is too low indicating that the government gives too much weight to the median voter.

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