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New Tax Building Blocks

Peter Kavelaars

It's like a tax plate with a groove: simplicity, simplicity, and more simplicity. In other words, everyone calls for simplification of the tax system. Politicians, in particular, are guilty of this, which is striking because a large part of the tax complexities are caused by political hobby horses and amendments to legislation. But also by a legislator who wants to regulate every detail: after all, the tax system must not have any loopholes, avoidance behavior must be prevented, and above all, it must be as fair as possible. In short: a separate tax regime for every taxpayer. This way, we will never achieve simplicity. But real simplicity is also not possible. Society is too complex for that. If it were to become really simple, I can guarantee that the tax system would turn out to be unfair. We don't want that either. In short: a true balancing act.

In this context, it is not surprising that there are regular calls for the establishment of tax review committees and various reports are published with well-intentioned suggestions for tax adjustments. At least in the Netherlands, this has not proven to be very useful in recent decades because such thick reports disappear into the well-known bottom drawer after publication. This is a pity because they often contain useful and good suggestions and ideas. Recently, a new so-called Building Blocks report has been published in the Netherlands, which provides a large number of suggestions and alternatives for tax adjustments. 'New' because a similar report was published a few years ago, which included no less than 160 proposals; this time there are about 80. Remarkably, within such a short time, another report is published without an evaluation of the previous report: What has happened to those proposal? Which proposals are no longer feasible? Which need to be adjusted? What new proposals are there? The civil servants have simply started over. That seems to me to be a rather ineffective approach. In any case, it is useful to see what ideas are in it that may also be interesting for the Caribbean Kingdom. But I'll start with some suggestions that it is not advisable to pick up. Once again, attention is paid to lowering the VAT rate on vegetables and fruits to 0%. The current caretaker government initially wanted to introduce this as well, but a study focusing on this showed that it is not an effective and efficient measure and that its effects are extremely uncertain. It is clear that such a scheme should not be introduced. Much more useful, for example, is to provide fruit to children in schools every day.

Another proposal that certainly does not deserve to be followed is the introduction of a sugar tax. Not because it is unhealthy to limit sugar consumption, but because such a tax is far too indiscriminate. It simply boils down to a general price increase for sugar. In addition, there are all kinds of complications in the implementation of such a tax. Incidentally, there is currently an investigation into such a tax, although it has been done several times before.

A completely different suggestion mentioned, which is much more far-reaching, concerns the so-called integration of wage tax and income tax with the premium levy for social insurance and in particular with the premium levy for social insurance. These levies are levied in a virtually similar manner in both the Netherlands and Curaçao. Most people deal with both levies and the income on which tax and premiums are levied is usually (almost) identical. It therefore seems indeed useful to merge these levies, despite the different backgrounds. However, there are still some hooks and eyes to this. One problem, for example, is that as soon as there are cross-border incomes or activities, the tax rules and the social security rules do not fit together as well. Merging the levies can then lead to double taxation or to non-taxation. A solution must therefore be found for this. Another thorny issue is the so-called premium maximum: no premium is due above a certain income. With an integration of premium levies into the tax system, this maximum disappears. This means that higher incomes will in fact pay more tax. That will have to be compensated for in some way. Finally, another problem is that above a certain age, usually no or fewer premiums are due; for example, for old-age insurance. That maximum also disappears with an integration and that too needs to be addressed. Here we see a fine example of a measure that seems to lead to simplification, but which creates all kinds of other complications. This is not an unknown phenomenon with fiscal 'simplifications'.

A final point of attention concerns the innovation box: taxing profits achieved with innovation at a lower profit tax rate. That seems like an interesting facility to stimulate innovation. Unfortunately, however, this is not the case. Stimulating R&D should not be addressed on the so-called output side, but rather on the input side. In other words, facilitating labor and capital that is used for R&D. Research confirms this latter and also shows that the innovation box is not effective: the facility does not demonstrably lead to more R&D and innovation. It is therefore surprising that the proposal is not made to abolish the scheme. The money released could then be used to stimulate the input (extra) by taxing innovative labor and innovative capital less. In the Netherlands, we already have such a scheme aimed at labor, but it could be expanded.

Although there are quite a few reservations about the Building Blocks report, it is useful to take note of it to see if there are any ideas in it that are worthwhile to include in the tax system.

Peter Kavelaars is Professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.

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