The abolition of the dividend tax

The plan of the Rutte III cabinet to abolish the dividend tax is continuously receiving negative attention in the media. The cabinet couldn’t deliver convincing evidence that the plan would have a positive effect on job creation. The plan also tears a hole of 2 billion in the budget.

Recently there was news that abolition of the dividend tax seemed to be necessary for legal reasons. Currently the Dutch dividend tax only affects foreign investors because Dutch investors can deduct the dividend tax from their tax return. Denmark had the same rule, but was sued by foreign investors. The European Court of Justice found in favor of the foreign investors because it considered the policy discriminatory. If the Dutch state would lose in a similar court case it would mean that foreign investors would be allowed submit a request for a tax refund as well. Because the Netherlands Tax and Customs Administration would not be able to deal with such a change, it would de facto necessitate abolishment of the the dividend tax. I don’t understand however why plan B – no tax refund for Dutch and foreign investors – is not possible.

I suspect the politicians of the VVD (the People’s Party for Freedom and Democracy, which is the largest party in the Rutte III) launched the plan because the lobby of the multinationals whispered it in their ears. According to the news item the legal argument may have been the real reason for Rutte III. It wouldn’t have been communicated openly because public servants had advised not to mention the legal aspect. It would have weakened the legal position of the Dutch state. Did Rutte III really create a smoke screen? Often the simple explanation is the better one: the VVD politicians are not political masterminds but the pawns of the multinationals. The lobby for this plan goes back for years and the legal dimension only entered the spotlight very recently.

Whatever the true reason may be, in principle no one likes discrimination? Certainly not if we are discriminated, as with the German road toll plan. This plan entails that foreigners pay tolls for the use of German highways, while Germans get a refund on their road tax for the tolls they pay. At the end of last year the Dutch state decided to join other EU member states in a legal case against Germany at the European Court of Justice. Is it not consistent then to deal with the dividend tax as well?

In the end, what really matters for me is if the abolition of the dividend tax is honestly compensated by higher taxes on capital and profit (specifically including corporate tax on the profits of companies). We will have to wait for the upcoming government budget later this month, but it does seem to go that way. The plan would be to cancel the intended reduction of the highest corporate tax to 21%. Instead, it would be reduced to 22% to compensate for the loss of the dividend tax.

The problem is that the highest tariff of the corporate tax currently is 25% and used to be 46%. The Netherlands allows itself to be dragged into a race to the bottom for tax competition along with other states. The idea is that corporate taxes should constantly be reduced because companies might relocate to other states where taxes are lower. Consider some statistics. The tax burden (total revenue of taxes as a percentage of the gross domestic product) has risen from 37,2% in 1995 to 38,5% in 2017. The revenue of the corporate tax as percentage of the gross domestic product rose from 2,87% in 1995 to 2,90% in 2017.

The tax burden evidently rose while the share of the corporate tax remained virtually unchanged. This small change is more grave in reality. The Netherlands Bureau of Policy Analysis (CPB) can partially explain the leveled revenues of the corporate tax with two causes. On the one hand the lowered tariffs were compensated by a broader tax base, caused by less room for tax deductions, depreciation and such. On the other hand there is a shift in the legal entity used by companies, for example from sole proprietorship to the private limited company (plc). A business using the sole proprietorship entity pays income tax and a plc pays corporate tax. Because corporate tax is lower, it is attractive to convert the sole proprietorship legal entity to a plc. The consequence is that revenues from the income tax take a hit.

The above is of course only a part of the answer because we only discussed corporate tax. Unfortunately I can’t find any good historical statistics on the division of the tax burden between companies and households. I have a strong suspicion that these would show that the share contributed by companies has decreased while the share contributed by households has increased. Lowering the corporate tax tariffs slightly less sharply is not going to solve the problem.

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