The rumors are persistent: the government intends to introduce a third tax bracket. This would mean a lower tax rate for the first portion of income. But will the average person benefit from this? We had a chat with Thijs Knaap, chief economist at APG, to find out.
Much is still unclear, such as the exact income range the new bracket will cover and what tax rate will apply. "Currently, in the Netherlands, we have two income tax brackets for income from work and home ownership. The first bracket covers income up to just over 75,000 euro, with a tax rate of almost 37 percent. The second bracket, for income above 75,000 euro, has a tax rate of 49.5 percent," Knaap explains. According to him, these are significant percentages. "The policymakers probably think practically; we already have two brackets, so why not add a third? It's certainly executable.
But what does it mean for people with an average income?
“Less income tax. Of course, we don’t know exactly what it will look like yet. But there’s a good chance that a significant portion of the salary of people earning up to 44,000 euro (the gross median income according to the Central Planning Bureau) will fall into this new bracket with a lower tax rate. However, this also applies to our prime minister Dick Schoof, who earns 175,000 euro. He too will pay less income tax on the first 75,000 euro of his salary.”
How will the government fund this?
“One proposed change is that the second bracket, with the high 49.5 percent rate, will apply sooner. This would impact high earners. If that’s enough, it would redistribute wealth from the rich to the poor, giving average earners some breathing room. After all, they benefit from the reduction and don’t have to pay extra. But it could be that more will be needed, which could mean increasing taxes in other areas or reducing allowances. Then it becomes a bit of a zero-sum game. There’s also talk of allowing the national debt to increase slightly. But that’s just postponing the issue.”
The Netherlands seems to have a tradition of tinkering with the tax system. What’s the goal of these changes?
“There can be different objectives. For example, encouraging more people to work. This is necessary, by the way. The current government is critical of labor migration, but the work still needs to be done. If you ask how taxation influences whether people work more or less, the marginal tax rate is often looked at. This is the tax pressure workers feel when their income increases. So, if I work an extra day or take a job that pays 100 euro more, what do I actually take home? It turns out that up to 25,000 euro, there’s a very low marginal rate. You get to keep most of what you earn, thanks to various tax credits and allowances. After that, the marginal rate increases quickly, for example, because you lose those allowances or because income tax credits disappear. The point is, if you want people to work more, you need to lower the marginal rate in parts of the system where many people are. If I look at the tax system and introduce a new bracket with a low rate, as might happen, this mainly reduces the marginal pressure for people earning up to 25,000 euro. That’s only 17 percent of workers - about one in six. That’s not a lot. For the other 83 percent, it’s just a small bonus. You pay less tax, but it doesn’t encourage you to work more.”
So, it seems the government just wants to give everyone a little extra.
“Correct, and there’s nothing wrong with that. It’s a political choice. However, I should add that a lower tax rate might just be the nudge people need to keep working beyond retirement age. There’s quite a large group around that age. They might think, a lower tax rate means I earn more, so I’ll keep working for another year. That’s an added benefit of such an extra bracket. But as mentioned, that reduction has to come from somewhere. It could well be that people at the upper end of the salary scale, like many older people, end up losing as much elsewhere as they gain in the first bracket.”