Reinventing the Dutch tax-benefit system: exploring the frontier of the equity-efficiency trade-off

Abstract

European governments aim to raise labour supply, cut unemployment and, at the same time, maintain social cohesion. Yet, economists have stressed the tradeoff between these objectives. This paper reviews the key policy insights from optimal tax theory to identify options for reform in the tax-benefit system that can potentially improve the equity-efficiency trade-off. Using a comprehensive applied general equilibrium model, we then explore whether reforms along these lines in the Dutch tax-benefit system raise employment without sacrificing equality. The analysis reveals that selective tax relief for elastic secondary earners and low-skilled workers have this potential. A flat income tax structure, possibly combined with a negative income tax, worsens the equity-efficiency trade-off.Keywords Tax-benefit system · Labour supply · Unemployment · The Netherlands · Applied general equilibrium JEL Classification D31 · D58 · H24 · J22 · J68

For Better or for Worse: Tax Reform in the Netherlands

“…In fact, the elasticities are based on a meta analysis by Evers et al (2008) on 32 scientific studies, 6 of which refer to the Netherlands. De Mooij (2008) concludes that the EITC stimulates labour supply of secondary earners but at the expense of primary earners' labour supply. In addition, De Mooij (2008) concludes that a removal of the transferability of the general tax credit increases labour supply of partners in particular.…”

“…De Mooij (2008) concludes that the EITC stimulates labour supply of secondary earners but at the expense of primary earners' labour supply. In addition, De Mooij (2008) concludes that a removal of the transferability of the general tax credit increases labour supply of partners in particular. Furthermore, our analysis shows that there is a strong response at the extensive margin and this result is in line with the study by Bosch and Van der Klaauw (2012).…”

Fiscal Policy and Income Inequality

“…Late 1990s Source: Integrated Values Survey 1981-2008 ©International Monetary Fund. Not for Redistribution about these trends, there is much less consensus on the factors driving them.…”

“…In countries that emphasize the income support objective, benefits are often conditional on the presence of children in the household and generally phased out more steeply with family income so as to prevent leakage of benefits to higher income families and reduce fiscal cost (Canada, France, Korea, New Zealand, the Slovak Republic, the United Kingdom, and the United States). However, the steep phasing out of benefits causes high marginal tax rates and creates strong adverse labor supply effects (De Mooij, 2008).…”

Taxation and female labor supply in Italy

“…Up to twenty years ago, the theoretical literature on optimal taxation converged to a scenario characterized by a basic income transfer and an almost flat income tax. More recently, the literature focused on in-work benefits (Aaberge et al (2000), Saez (2002), Immervoll et al (2007), Mooij (2008), and Blundell et al (2011)). Several studies have evaluated the expected labor supply effects from introducing in-work tax credits in the U.S. and U.K.…”