November 1, 1999

The economic effects of the tax revision in 2001

CPB: Belastingherziening 2001 stimuleert arbeidsaanbod en werkgelegenheid

Press release

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Dick Morks Read more

The proposals include a shift from direct to indirect taxes (including environmental taxes), a broadening of the tax base and a reduction of the tax and premium rate on labour. This paper describes the proposals and their impact on the government budget and gives an assessment of the effects on the purchasing power of individual households. These effects are ex ante effects since indirect effects of the tax revision on the economy, e.g. wage moderation, are not taken into account. Moreover, these effects are partial because for technical reasons they exclude the effects of measures to broaden the tax base and the introduction of a schedular tax on a presumptive return to personal wealth. Finally, an analysis is presented of the long term macroeconomic effects of the tax revision.

The ex ante budgetary cost of the tax proposals is estimated at around 5 billion guilders (1999 prices), although there is a considerable margin of uncertainty. The ex ante and partial effects on the purchasing power of individual households are positive but are not neutral with respect to income levels. Low-income households will benefit considerably, in part owing to the introduction of a tax rebate for working people. Incomes just above the average will rise by much less in relative terms, while higher incomes will again benefit considerably. However, it must be noted here that higher income earners will be hit by tax measures concerning personal wealth and tax base broadening. The analysis of the long term macroeconomic effects shows that the tax revision has a positive impact on employment. Employment in hours goes up with 1.5% of which unskilled employment with 2.2%. The reason for this is twofold. Lower marginal tax rates for most groups mean that labour supply will rise. The second reason lies in the fall of equilibrium unemployment due to the reduction of the average tax rate and the replacement rate which both promote wage restraint.

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