Fundamental Reform of Taxes on Capital Income in the Netherlands

Abstract: In the Netherlands, the tax treatment of capital income influences the allocation of capital and risk-taking, resulting in deadweight losses, tax arbitrage and financial fragility. Moreover, the tax treatment of capital income implies that income redistribution is not achieved at lowest social costs. Fundamental reform of the taxation of capital income in the Netherlands can generate substantial efficiency and equity gains, while reducing financial fragility. This paper proposes a uniform tax treatment of all capital income from savings, portfolio investments, pensions, owner-occupied housing and business-ownership with a uniform, flat-rate tax on all capital incomes. The efficiency of the mix of Dutch taxes is increased by shifting the tax burden from labour to capital income as much as possible in a distribution-neutral way. The debt bias should be removed in the entire tax system.