Dutch Parties Agree to Simplify Tax Code

The number of income tax brackets would be reduced from four to two.

The four parties negotiating to form a coalition government in the Netherlands have agreed to simplify the tax code, the public broadcaster NOS reports.

The plan would reduce the number of income tax brackets from four to two. The threshold at which the top, 49.5-percent rate kicks in would be raised to €68,000.

Middle and high incomes would benefit from the changes. Low incomes would continue to pay 37 percent income tax.

The goal

The goal is to encourage professionals toward the upper end of the income scale to work more.

Under the current system, it makes little financial sense for high earners to work an extra day or accept a promotion when it shifts them to the top tax bracket.

How it’s paid for

The plan, which foresees €5 billion in tax relief, would partly be paid from surpluses and partly from raising other taxes, such as VAT or energy levies.

To prevent income inequality from rising, the parties are also looking to limit the home mortgage interest deduction, from which wealthy homeowners benefit the most. The two Christian parties and liberal Democrats support this. Prime Minister Mark Rutte’s center-right liberal party is wary.

What’s next?

More tax reforms are likely. The Dutch revenue service has warned that the system is now so complex it makes efficient tax collection impossible.

Among the changes being considered are harmonizing rules for full-time employees and the self-employed, easing the burden on (small) businesses and converting health and rental subsidies into tax credits.

The four parties are expected to finalize a coalition agreement within the next few weeks.