IMF Recommends Tax Shift

10 Nov 2015

The International Monetary Fund (IMF) regularly reviews the developments in each of its member countries. November 10, a so-called Article IV review was published on the Netherlands, in which the Dutch government is advised to adapt the tax system to promote growth and employment. The IMF staff advises:

"large efficiency gains could be achieved by shifting the tax burden away from labor, and towards consumption and capital income". 

The review concludes that the Dutch tax system currently favors debt and has contributed to overly-leveraged households and firms. The labour market is caracterized by a rapid rise in the share of the self employed, which "suggests tensions in labor market policies that need to be addressed".

The IMF points, for example, at the "overly rigid regulatory regime for regular employment". The self employed receive large tax exemptions and tend to pay lower social contributions, resulting in lower labor costs than for regular labor. These factors are a threat to the stability of the treasury, and potentially to the pension schemes.

With regard to the 2016 budget, the IMF states:

"next year’s €5 billion labor tax cut package is mainly targeted at female workers and low-wage earners – the most responsive groups – which should help create new jobs and increase hours worked. But more could be done and faster. The large subsidies on home ownership and pension income could be phased out more quickly than currently envisaged, allowing a budget-neutral and growth-enhancing rapid reduction of the labor tax wedge. 

Moreover, important tax revenue and efficiency gains would result from harmonizing the currently fragmented capital income and value-added tax schemes. Revenue shortfalls from corporate tax reforms could be offset through broadening the VAT base and unifying VAT rates."

These recommendations are in line with the New Era New Plan report published by The Ex'tax Project in November 2014, which included proposals on shifting the tax burden from labour to natural resources use and consumption. 

 

IMF (2015) Kingdom of the Netherlands: Staff Concluding Statement of the 2015 Article IV Mission.