Is scrapping dividend tax worth two billion?

No proper reason can be found for scrapping dividend tax, says Bas Jacobs. Do you agree?

“As a lawyer, I look at the legal basis: what is dividend tax actually there for? You have to come to the conclusion that the legal basis is rather weak. The dividend tax is an input tax which was originally devised so that the tax authorities would receive their money earlier, and to cut down on fraud. However, those have long since ceased to be its only purposes. It’s also based on the idea that the Netherlands may tax the dividend distributed to shareholders because the corporate profits are generated here. This principle, which lawyers call the source principle, does not apply so strongly here, as most of the profits of listed companies come from abroad.”

So does that make scrapping the tax a good idea?

“So far I’ve only talked about the lack of a legal basis. However, there are a number of tax rules with a weak legal basis. That isn’t the key consideration for policy makers. The thing they really want to know is how to maximise prosperity in the Netherlands. That means you have to ask yourself whether the benefits of scrapping dividend tax outweigh the costs – a 1.9-billion-euro reduction in tax revenue.

“Interestingly, economists differ on this. Jacobs’s argument is that dividend tax scarcely impedes Dutch companies’ ability to raise capital and therefore has a negligible effect on the business climate. His underlying assumption is that there is a global capital market where enough shareholders can always be found.

“According to John Lorié and Roel Beetsma, though, this discussion is about marginal shareholders. These are the shareholders with the lowest return on their investment, for example because they can’t deduct the dividend tax they’ve paid in the Netherlands in their own tax return. They’ll be less willing to buy shares in a Dutch company, and this will make it harder for these companies to raise capital. Suppose the truth lies somewhere in the middle: in that case scrapping dividend tax will in fact have an impact. The only question is whether that impact is worth two billion.”

Bas Jacobs claims that efforts to create the most attractive business climate have for years led to a race to the bottom. Why is it so hard for countries to make agreements with one another about this?

“Countries compete with one another – this is the prisoner’s dilemma that Jacobs refers to. The difference is that I’m less pessimistic about the possibility of reversing this ‘race to the bottom’ trend together. It’s difficult, but in Europe and within the OECD all kinds of agreements are made on matters such as reducing tax avoidance, unfair tax competition and unlawful state support. Likewise, negotiation is currently in progress within the European Union about a levy on digital services.”

At the end of this month you’re organising a symposium on dividend tax at which both Bas Jacobs and John Lorié will be guests. Do you think Prime Minister Rutte will be influenced by a group of scientists at this stage?

“I don’t expect the coalition to suddenly change its position. There’s still a majority on this point in the House of Representatives. And in the Senate it’s important to note that the abolition of dividend tax is part of a larger package, which I don’t expect senators to reject in its entirety. But even if they do go ahead with scrapping the tax, the discussion isn’t over at that point. Opposition parties are likely to put dividend tax in their election manifestos. That’s reason enough to set out all the scientific pros and cons.”