Bente writes*
Income inequality in the Netherlands in 2017 was around 0.55, as measured by the Gini coefficient (CBS). However, the Netherlands implemented many policies to reduce this income inequality such as a progressive tax system and unemployment benefits. As a result, after taxes and benefits, the Gini coefficient for disposable income is only 0.29 (CBS). This shows the effectiveness of policies in the Netherlands to reduce income inequality. However, this is not yet the case for capital inequality in the Netherlands as the Gini coefficient for capital [a subset of wealth] was 0.79 in the Netherlands in 2017 (CPB) — a troubling figure that needs to be reduced.
Currently, households with more capital have a higher chance of getting an inheritance (Centraal Planbureau). In the Netherlands, the 10% highest capital owners receive 35% of gifts and 26% of inheritances, and they own 63% of net capital (Centraal Planbureau). Inheritance taxes start at 10% for the deceased’s partner and children and rise to 18% for other family members, on amounts below €154,000. Above that sum, the tax is 20% (belastingsdienst erfbelasting).
The average inheritance tax in 2015 was around 12%; the average on gifts was only 6% (Centraal Planbureau). Compare those figures to the lowest income tax: roughly 36% on incomes up to €38,000 (Belastingdienst inkomstenbelasting). This disparity shows the effort the Netherlands made to reduce income inequality, and how comparatively little has been done to mitigate capital inequality. In the Netherlands, only 0,51% of tax revenues come from inheritance taxes.
The inheritance tax must rise to reduce capital inequality (Geron), but such increases are not politically popular. Many citizens view inheritance taxes as an unfair double taxation, so politicians avoid them to protect their votes.
Action is needed to increase the inheritance tax in the Netherlands, to reduce capital inequality and possibly reduce wealth inequality. Wealth inequality remains higher than income inequality. Increased inheritance tax might reduce wealth inequality by creating a more balanced distribution of capital and wealth over generations (CPB). However, in the literature, a consensus has not been reached on whether inheritance increases or decreases wealth inequality (Elinder). This also results in discussions on the possible impact of increasing the inheritance tax (Elinder). In the Netherlands, research showed that inheritance did not cause an increase in wealth inequality between 2007 and 2015 (Centraal planbureau). This was because large inheritances were given from older wealthy people to less wealthy generations (Centraal planbureau). Furthermore, although lower-wealth households receive smaller inheritances, these inheritances represent a relatively higher increase in wealth for the lower-wealth households (Centraal planbureau vermogensongelijkheid). Considering these findings, the key question remains whether increasing the inheritance tax will help decrease wealth inequality in the Netherlands.
Bottom line: Higher inheritance taxes will reduce capital inequality in the Netherlands. Further research is needed to see if they will also reduce wealth inequality.
* Please help my Real Donut Economics** students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂
** Why “Real”? In short, because (a) Raworth’s claims to being a “21st century economist” denies that all of her ideas were presented by others in the 20th century and (b) she presents no viable mechanisms (besides “be nice”) for achieving equality and sustainability. My students are more realistic. In long? Read this.
While the tax may temporarily increase capital inequality, it will only take capital from people presently doing something with it like buying yachts, paying wages, blowing it at casinos, expanding factories, buying heroin…whether for a noble or idiotic purpose, they are certainly not burying gold in the back yard. The money remains in the private economy. Natural increase and spendthrift heirs diminish and redistribute the capital. Private companies will have to borrow back the capital they had earned, or sell out to financiers. The government will spend it on rewarding friends and punishing enemies, as all governments do. I fail to see the benefit.
Dear Philip,
Thank you for your critical feedback. I understand your argument but hope the Dutch government in this policy will use the tax money in the right ways. And therefor help decrease the inequality in the Netherlands even more.
I meant to say “decrease capital inequality” but can’t find a way to edit my comment
Interesting read. I also know the argument of unfair double taxation from Germany where I grew up. However, compared to Germany, The Netherlands have a substantially higher inheritance tax at the lower end. In Germany, the deceased’s partner does not have to pay any taxes for the first 500.000€. This tax-free inheritance sum varies depending on the relationship with the deceased (e.g. for children it is 400.000€, grandchildren 200.000€, etc.). After that tax-free amount, a progressive tax kicks in that can go up to 50% for very large amounts (above 13 Million €). In theory, this system saves most people from having to pay inheritance tax, while still redistributing significant wealth inequality. The thresholds make it more politically acceptable for the broader population while the average overall inheritance tax is still 10% (in 2023).
However, in reality, there are many loopholes and how effective this system is can be debated.
Dear Emil,
Thank you for your comment! I think it is interesting to hear how the German system works and I will delve deeper into it to learn from it strengths and weaknesses and use it in my paper!
Interesting to see how the inheritance tax works in the Netherlands, especially as I didn’t know it to be this disproportional. I looked at Poland’s inheritance tax and it looks like it is 0% up to €2.1 million and up to 20% for assets above this threshold, compared to this the NL’s tax is much higher.
Dear Dominika,
Thank you for your comment! Interesting to hear that the threshold to pay tax in Poland is so much higher than in the Netherlands.