Flat but Fair: A Proposal for a Socially Conscious Flat Rate Tax in the Netherlands

Abstract

This article advocates the introduction of a flat rate income tax in the Netherlands. Such a system would lead to a better-functioning labour market and fewer administrative costs for employers. Progressivity would be achieved through tax credits at the household level. By itself, a flat rate tax usually has adverse distributional effects. However, if we allow the income-dependent health care contribution also to be given a flat rate, the distributional effects would be substantially less significant. This article further gives some recommendations for lowering the flat tax rate by shifting away from income taxes, increasing value-added taxes (VATs), and broadening the tax base. It concludes by showing that a marginal tax rate plus social security contributions of 33.25% is possible. The focus of this proposal is the Netherlands, but several aspects of it may be relevant to other EU Member States.