Picketty? Smart book but it’s wrong

By Phillip de Witt Wijnen, Economics Editor NRC Handelsblad, Sat. 14 June 2014

Gerrit Zalm was right. Back in the summer of 1999 when Secretary of State, Willem Vermeend,  showed him the new tax reforms, Zalm, then Minister of Finance, thought that it was a good plan but he said, “You need to choose another title.”  Vermeend had chosen the title: A Tax Plan for the 21st Century. “There’ll be other reforms after this” said the Minister. Vermeend still laughs about that. “Yes, I may have been a little ambitious. Gerrit brought me back down to earth.” Vermeend did eventually present the plan to the Dutch Parliament, but under the title: A Tax Plan for 2001”, named after the year in which it was implemented.

And now, 15 years later, it’s lying on the cutting block. Vermeend’s tax plan with its three key points: lower taxes, fewer tax deductions and a fixed wealth dividend of 4% is in dire need of reform. The former Secretary of State admits that shortly after the new plan was implemented, it was propped full of exemptions, deductions and other fiscal options. The Chamber wanted a tax law for every social problem. Vermeend himself had, by this time, moved on to the Ministry of Social Affairs where he became the Minister.

One of Vermeend’s successors, Eric Wiebes (Liberal Party) is busy putting together a new tax plan. He had originally promised to have an official cabinet reaction to the Van Dijkhuizen Commission Report before the summer. This commission proposed, at the request of the cabinet, far-reaching proposals for tax reform. The leader of the commission was Zalm’s current fellow member of the ABN Amro Bank Board of Directors, Kees van Dijkhuizen. Since then, Wiebes has said he will only be able to present the cabinet’s reaction after the summer. The material is complex and the effects on consumer spending are unclear. The preliminary reactions of the Dutch government coalition parties show how politically charged the discussion is  – the Liberals want fewer taxes and the Labor Party wants to tax the rich more heavily.

Willem Vermeend, currently Honorary Professor of Economics and Internet Business at the Maastricht School of Management, internet entrepreneur, advisor and member of several boards, still follows the developments around tax reform in The Hague with interest. He’s got serious doubts about the new reforms.

The new tax plan …

It’s going to fail!

What do you mean?

Really, it’s not going to work. It can only work if you pump a lot of money into it. Van Dijkhuizen’s recommendations are budget-neutral at the request of the cabinet. He takes away a billion here and adds it to something else over there. If you really want a new tax plan to stimulate the economy and create jobs then you’re going to need – I’ve calculated it – at least five billion Euros. Without this investment Wiebes can forget it.

How should it be spent?

You need to use all of the five billion to lower labor costs. Then companies will start to hire people again. That creates jobs.

But that’s also what the political parties in The Hague want isn’t it? They just don’t agree on how to finance it. The Liberals want to pay for it by reducing government spending, eg. by sharply cutting benefits. What are your thoughts on how we can earn back the five billion?

Simplifying the benefits system  and eliminating non-productive government expenditures are always good steps to take. They however are not easy to do and it will not yield the required amount of money. Years ago Zalm and I also wanted to do this. We discovered then that every time we removed something from the system we decreased consumer purchasing power. If this decrease rises in percentage points  and affects potentially 50% of the Dutch population you will have a revolt.

What’s needed is for the government to realize that you should not want to earn back all of the money that you pump into the system right away, or even completely. The money will be paid back in the long-term via the extra growth, extra jobs and therefore lower unemployment benefits. According to my  calculations you would earn back 30-40% of the five billion within three years – therefore still within the lifetime of the current cabinet. Over the longer term you would earn back 60%.

Where’s the cabinet going to get five billion Euros from?

The money’s there.  In addition to cutting government spending you  can also look at how much flexibility you have in the budget. According to the most recent calculations, our budget deficit in 2016 will be 1.8% of the Gross National Product. If there are no setbacks we can expect a deficit of 1% in 2017. The European norm is still 3%. Therefore in 2017, according to conservative estimates, we will have 1.5% extra to invest. That is, considering that our Gross National Product is 600 billion Euros, approximately 9 billion Euros. This is more than enough for lower labor costs. I say, “Wiebes, present this calculation to the cabinet!”

But this cabinet, and Brussels, eventually want a zero deficit?  

I do too. The deficit needs to be brought back to zero, but it doesn’t matter if we reach that goal two years later. The Liberals need to be prepared to concede on this point.

The Labor Party, your own party, wants to pay for the lower labor costs by raising taxes for those with the highest incomes under the motto of “equal sharing.”

That won’t work. Social Democrats make the mistake of thinking that you can fix everything through taxes. Progressive taxation [in which those with the highest incomes need to pay an increasingly higher percentage] is a wrong idea. Increasing the tax burden slows growth, costs jobs and eventually increases the amount in the treasury by a maximum of only a half a billion Euros. Higher taxes for the rich mean that the poor get poorer. People flee the higher taxes and companies invest less which leads to a loss of jobs. The best way to combat inequality is to make sure that everyone has access to good education. Invest in education and in job creation at the same time.

The Labor Party’s stand point is totally in line with Thomas Picketty’s popular theory on how to combat the inequality in wealth distribution.