Opinion | Break the benefits machine and prevent poverty

There are only two times of the year when most people think about taxes. One moment is when the declaration is made. The other moment is when there is a change in income. For example, someone may work more or move up in the pay scale. At such a moment the words ‘gross’ and ‘net’ suddenly come to life again. You will gain a hundred euros per month, but that is gross. What do you get out of that?

What people are left with turns out to be surprisingly bad in the Netherlands. Sometimes it is very little, it is unclear and it can depend on all kinds of random aspects of how someone lives. Low-income people are at greatest risk. This danger is increasing and worsens the poverty problem in the Netherlands. Many people at the bottom would rather have a certain income that is slightly lower than have to take a step into the dark.

To begin with, the Dutch pay relatively high taxes. No one pays 80 or 90 percent of their total income in taxes. But the taxes are felt the moment there is a change in income. If allowances need to be repaid, for example. Or if someone immediately reports all changes, and has less left at the end of the month, even though the gross income has increased.

We therefore believe that the word ‘tax burden’ applies more broadly, namely as the pressure that people experience in their lives. Perhaps the term ‘tax pressure’ is therefore even more appropriate: former certainties are called into question by changed circumstances.

Unpredictability

And in a labor market in which jobs are often temporary or part-time, these circumstances may change quite often. The problem is known to politicians and ministries. Yet little is done about it. In fact, the problem will become even worse in 2024.

A single-income person with children will face the highest tax burden on the additional earned income in 2024, namely 80 percent. This means that if this single-income person with an income of 25,000 euros were to double his or her income to 50,000 euros, a net amount of 5,000 euros would remain of the gross increase of 25,000 euros. That is what benefits the single-income person.

80 percent is high. But even worse is the unpredictability. The precise tax burden for a household can be as low as 10 percent, depending on who works and how the income is earned. The pressure varies from 8 percent to as much as 90 percent, depending on the situation. A normal person would get completely stuck in this, and that is what happens.

The operation of this system of taxes and allowances is based on steering with incentives. The controlling character makes it unjust. It also provokes creative constructions from entrepreneurs who employ their partners to benefit from a lower tax burden. The profit from this type of construction can amount to 10,000 euros per year.

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The tables with the ‘marginal pressure’, as the Ministry of Finance calls it, are published annually. So everyone knows about it. The fact that it does not change or even gets worse is similar to the mechanism of a ratchet wrench: a wrench that can only turn in one direction. You use it when doing odd jobs when you don’t have room to make a full turn with the nut. The wrench has an internal mechanism that allows you to apply pressure in one direction (to loosen the screw) and allow it to run freely in the other direction. This is also how it has become with the tax burden. Changes only go one way: up.

Partly due to the introduction of the poverty figure that the CPB has been reporting for a number of years, policymakers are constantly at the ready with the ratchet wrench. The upcoming CPB calculations of the election manifestos will also report the ‘number of children in poverty’, so the ratchet wrench will not be missing during the cabinet formation. Under no circumstances should the poverty rate be reduced; every citizen below the poverty line is actually one too many. So keep going is the motto.

Many handymen had long felt the pinch and had stopped working, but when it comes to poverty, such a moment of insight is missing.

All this overthinking increases the tax burden and also the ‘tax burden’. Working becomes a risk. Anyone who can survive on social assistance and allowances must be very careful. Working more can cause damage. Moving in together, or taking in someone who may have their own income, is also risky. The poverty policy has encouraged a large group of people to no longer want to work (white). People who are healthy in body and mind, but have received the message from the tax system: do not change, because that will cause financial problems. And if necessary, a social services client manager will convey the same message, because additional income in addition to benefits is also quite burdensome for implementation.

The directive nature makes taxation unjust

The cause of the tax burden is the downside of the policy that focuses on one specific part of the income distribution. If you want to give low incomes something extra, but not higher incomes, you have to be very precise in ensuring that a supplement only applies to that group. This can easily be sold to the supporters and it works beautifully in the purchasing power models for lower incomes. You immediately see an effect and it looks like a social measure.

Extremely expensive

It is understandable that poverty figures and purchasing power figures have taken on a life of their own. They give the impression of social policy, because the lowest incomes receive support. And it is relatively cheap, because the measure only applies to a small group. It yields a lot and costs little.

And it has become relatively even more tempting because it has become apparent that when benefits are increased, almost all political parties believe that the linked AOW should also be increased. The latter makes increasing benefits extremely expensive. And therefore the appeal of increasing allowances is even greater.

The time when something needs to be done about this is getting closer. Many election manifestos and party leaders have spoken out in favor of solving this problem. But what no one says is that a real solution will consist of making painful choices.

The choice at hand, which is becoming increasingly unavoidable, is to phase out income-related schemes. We will have to work more with fixed amounts, as is also the case with child benefit and the AOW. These are predictable, understandable and they do not lead to a higher tax burden.

But the reduction also immediately means that some low incomes will suffer a net decline. In the case of the child budget or the basic grant, there is no other option, or the amounts will become lower. Lower, but more predictable. It may not be too bad for schemes such as childcare, where direct subsidy for childcare can achieve the same thing as the allowance.

The poverty policy has encouraged a large group of people to no longer want to work (white).

The challenge is to reform tax and benefits policy in such a way that the lowest incomes still remain sufficiently protected. Municipal assistance can play a role here, as can other forms of financial assistance or in-kind assistance that are not provided by the central government. More direct involvement with families, with knowledge of where exactly the need lies, prevents the automaticity of benefits. It is this ‘benefit machine’ that must be broken if we want to face up to the poverty problem.

Dark cloud

For incomes above the minimum, the promise is that it will become simpler and more predictable. That people can simply work overtime again, without fear of reimbursement. And that the choice to work more hours simply becomes a personal decision, without the tax burden hanging over people’s lives like a dark cloud.

The problem of tax burden may be the hidden problem of poverty and social inequality. Those who earn enough do not suffer from this pressure. It has escaped the grip of surcharges and recoveries. Anyone still in there must be very careful. People know this, and act accordingly. Sitting still is rewarded. In the words of Arjen Lubach: “People want to work more, but can’t afford it.”