Reforming the Dutch Tax Benefits System

Executive Summary

The Dutch tax system has become unsustainably complex and requires urgent structural reform. Successive governments have layered allowances, tax credits, and deductions onto the system, producing a fragile web that confuses citizens, overwhelms administrators, and undermines policymaking. Households often avoid applying for benefits due to fear of repayment, while those who do participate face high marginal effective tax rates — sometimes exceeding 80% — that distort work incentives. Even the Tax Authority has warned that its IT systems can no longer cope with the complexity.

Complexity erodes trust, transparency, and fairness in taxation. Because citizens cannot predict how work or income changes affect their disposable income, they face the risk of having to repay benefits. This has already had political consequences, with scandals around benefits repayments undermining confidence in government. Complexity also hampers democratic accountability: public debate narrows to visible items like tax brackets, while hidden interactions of allowances and credits escape scrutiny.

A structural simplification is feasible without sacrificing redistribution. Our proposal replaces all income-dependent allowances with a single, universal household allowance and merges the current system of phasing out allowances and tax credits into adjusted tax brackets. This would make redistribution explicit within the tax rates, preserve fairness across household types, and most importantly: drastically reduce errors and unexpected repayments. The household allowance would simplify administration, reduce stigma, and limit repayment risks, while maintaining targeted support for different family structures.

Policy recommendations

1. Replace all income-dependent allowances with a single, universal household allowance.
2. Abolish the general and employment tax credits, and integrate their effects into simplified tax brackets .
3. Choose a clear tax base — either fully individual or fully household-based — to end the current hybrid model.
4. Maintain fairness through differentiated tax rates for household types, while simplifying administration and reducing repayment risks.