June 30, 2016

Major reform outside government agreements becoming more difficult

Implementation of major tax reforms is practically impossible if political parties have not agreed on the subject in their government agreement. This is shown in the study on ‘The political economy of tax reform’ by Arjan Lejour of CPB Netherlands Bureau for Economic Policy Analysis, published today at the annual CPB Lecture. This is the first study into which factors would have an impact on the ultimate implementation of tax reform measures in the Netherlands.

Whenever major tax reform is not expedient, it may help to propose smaller scale measures, in order to break the status quo. Such smaller scale tax reform may ultimately lead to more support for subsequent reform proposals. It can be an effective alternative to major system reform, even more so in times of increased political fragmentation. This type of approach, however, can have the disadvantage of certain tax reform measures never being implemented; for example, because a lack of financial compensation would cause losses that are too big for certain groups.

The likelihood of reform actually being implemented is determined by whether it has sufficient public support and whether thorough research is available identifying the precise problem as well as the possible solutions (the reform). In this way, proposals will already be on hand when the opportunity for reform presents itself, such as when a new government is being formed. Furthermore, clever framing, trade-offs and political leadership may also help tax reform proposals to be adopted.

The study focused on analysing the implemented major tax reforms of 1990 and 2001, as well as on the failed reform proposals of 1991 and 2015. In addition, a number of individual tax reform measures were investigated, such as changing the vehicle registration tax into a tax on the emission of CO2, limiting mortgage interest rate deductions, simplifying child benefit regulations, and introducing the income dependent tax credit.

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