Mortgage interest relief under fire again following CPB study

The CPB concludes that the Dutch tax system is, in practice, less progressive than is often assumed. Although higher incomes are formally taxed more heavily, the wealthiest households ultimately pay relatively less tax than groups below them. According to the CPB, affluent households in particular benefit from fiscal structures and exemptions.

Wealth held in private companies

Kavelaars points in an interview on Dutch broadcaster BNR Nieuwsradio in particular to the role of Box 2 taxation, which applies to income from substantial shareholdings. Wealthy households are able to retain profits within private limited companies, allowing taxation to be deferred for long periods. ‘Businesses are performing well and generating profits. Those profits are taxed, but they are subsequently not distributed to shareholders,’ says Kavelaars. ‘As a result, substantial amounts of capital remain accumulated within companies and do not become available for consumption or additional taxation.’ According to the emeritus professor, this wealth is often passed on through generations. ‘In many cases, inherited wealth also remains largely outside the reach of taxation. From a societal perspective, that is not a desirable development.’ As a possible solution, Kavelaars suggests introducing a system of deemed dividend taxation, comparable to the existing deemed salary rules for director-major shareholders.

Mortgage interest relief ‘inefficient’

The CPB report is also highly critical of mortgage interest relief. According to the bureau, the scheme widens the gap between homeowners and tenants while at the same time failing to achieve its intended goals effectively. ‘Mortgage interest relief is, of course, an attractive arrangement for homeowners, but economically speaking it is neither effective nor efficient,’ says Kavelaars. ‘Moreover, the system has become extraordinarily complex.’ According to him, gradually phasing out or abolishing the scheme would create room to reduce taxes on labour. Kavelaars argues that this could help create a fairer distribution of the tax burden.

The debate surrounding mortgage interest relief also featured prominently during previous general election campaigns. Nevertheless, the current government has so far announced no plans to fundamentally reform the arrangement.

Growing inequality

According to the CPB, the current tax system undermines equality of opportunity in the Netherlands. Households with substantial wealth benefit disproportionately from fiscal advantages, while working people shoulder a relatively heavier tax burden. Kavelaars stresses that growing wealth inequality may not immediately damage the economy, but it does raise important societal concerns. ‘It does not directly undermine the economy, but it is not a healthy social development,’ Kavelaars concludes. ‘And it is certainly not a uniquely Dutch phenomenon; this trend can be observed worldwide.’