The Dutch tax system: a model for Scotland to follow?

I’m thinking about tax systems. Scotland has a wonderful opportunity to offer real change over the next year or so. It won’t, of course. But if it did want to reform the tax system, for example, where might it look? I’ve been wondering about the Netherlands.

Its income taxes are tryingly high – the effective top rate is 52%, just as it was in the tax-crazed UK until this year. However, there are more deductions than we get – notably, interest on some forms of debt, a privilege we reserve for buy-to-let landlords (see this week’s magazine). And beyond income tax there is some interesting-looking stuff going on.

There is a smallish annual wealth tax (under which houses and savings are assumed to have a 4% yield, and that yield is taxed at 30%). But in exchange for paying that, the Dutch are spared capital gains tax (CGT), and pay a low rate of inheritance tax when they pass wealth to direct family members – there is a very high nil-rate band, and the most you can pay if you pass money to children is 23%.

The idea is that the accumulation of wealth is encouraged (no CGT is surely a very good thing), and it can be passed on without too much more tax being paid.

This is far from a perfect system. Added together, all the taxes are far too high, it is still too complicated (the income tax forms look horrible), and it is, of course, ludicrous that we can have got to a point in which I say that 23% is not “too much more”.

I also have a horrible feeling that the lack of CGT next to the high levels of income tax might be a contributing factor in the Netherlands having one of the highest levels of personal debt relative to incomes in the world.

Still, our own non-indexed capital gains tax effectively operates as a very high wealth tax and scares people away from liquidating assets with gains. And anyone building a new tax system from scratch might like to note that it isn’t compulsory to tax absolutely everything all the time.