The Tax Tectonics: Well-being and Wealth Inequality in ... · Advisors. Peter’s kindness and love for tax studies have enabled me to combine academia and practice. He opened up

Tilburg University

The tax tectonics: Well-being and wealth inequality in relation to a shift in the tax mixfrom direct to indirect taxesWijtvliet, Laurens

Document version:Publisher's PDF, also known as Version of record

Publication date:2018

Link to publication

Citation for published version (APA):Wijtvliet, L. (2018). The tax tectonics: Well-being and wealth inequality in relation to a shift in the tax mix fromdirect to indirect taxes. CentER, Center for Economic Research.

General rightsCopyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright ownersand it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights.

- Users may download and print one copy of any publication from the public portal for the purpose of private study or research - You may not further distribute the material or use it for any profit-making activity or commercial gain - You may freely distribute the URL identifying the publication in the public portal

Take down policyIf you believe that this document breaches copyright, please contact us providing details, and we will remove access to the work immediatelyand investigate your claim.

Download date: 27. Jun. 2020

https://research.tilburguniversity.edu/en/publications/faeea7ff-cc21-4e84-a2f9-6b503994dea3

The Tax Tectonics

Well-being and Wealth Inequality in Relation to a

Shift in the Tax Mix from Direct to Indirect Taxes

Laurens W.D. Wijtvliet

The Tax Tectonics

Well-being and Wealth Inequality in Relation to a Shift in the Tax

Mix from Direct to Indirect Taxes

PROEFSCHRIFT

ter verkrijging van de graad van doctor

aan Tilburg University,

op gezag van de rector magnificus,

prof. dr. E.H.L. Aarts,

in het openbaar te verdedigen ten overstaan van een

door het college voor promoties aangewezen commissie

in de aula van de Universiteit

op dinsdag 10 april 2018 om 16.00 uur

door

LAURENS WILLIAM DREAS WIJTVLIET

geboren te Waalwijk

Promotiecommissie

Promotores: prof. dr. A.C. Rijkers

prof. mr. dr. J.L.M. Gribnau

Overige leden: prof. dr. G.J. van Norden

prof. dr. B. Peeters

prof. dr. P. Kavelaars

prof. dr. H. Vording

dr. A.M. Lejour

Ah! Never in all my years at university have I been required to get down to such

basic activities as now – and no-one will ever notice. When my thesis is finished

there won’t be any mention of blistered shoulders, grazed knees, splitting

headaches, or of mosquitoes and carnivorous flies. I wouldn’t dream of telling

anyone about those things. Not about those things nor about what lies ahead …

perhaps.

My thoughts turn to all those geologists, thousands of them who, like me, never

breathe a word about such annoyances as being in debt, going without food,

suffering sunstroke, undertaking long expeditions to no purpose, people working

against you, underhand behaviour.

Willem Frederik Hermans – Beyond Sleep

(translated from the Dutch by Ina Rilke)1

1 First published by De Bezige Bij as Nooit meer slapen in 1966.

[page intentionally left blank]

Voorwoord

vii

Voorwoord (in Dutch)

Promoveren zou een solitaire aangelegenheid zijn. Dat zal ik nooit beweren. Integendeel. De

reis van de promovendus is, om met Steinbeck te spreken, “like a full dinner of many courses,

set before a starving man. At first he tries to eat all of everything, but as the meal progresses he

finds he must forgo some things to keep his appetite and his taste buds functioning.”2 En eten

doet men niet alleen. Disgenoten maken een maaltijd tot een smakelijke. Zij voorkomen dat de

promovendus zich verslikt in culinaire illusies. Zonder hen blijft een recept slechts een geur- en

smaakloze woordenbrij. Zijn lessen leert de promovendus niet slechts door ondervinding. Hij

is geen autodidact. Leermeesters en metgezellen leiden hem naar zijn eindbestemming. Hun

komt dit proefschrift toe.

Leermeesters verdienen dan ook lof. Eerst en vooral Arie Rijkers, mijn promotor. Zonder zijn

vertrouwen, inspanningen, adviezen, geduld, inspirerende kijk op de wereld en vriendschap zou

dit project nooit zijn aangevangen. Laat staan dat het de eindstreep had gehaald. Hij hield koers

en was een baken van licht en warmte in barre tijden. Zijn lessen zijn niet slechts academisch.

Het zijn levenslessen. Die verrijking draag ik voor altijd mee. Woorden zijn slechts de

ééndimensionale weerslag van de dankbaarheid die hem toekomt. Zij kunnen daaraan nimmer

recht doen.

Promotor Hans Gribnau dank ik voor de betrokkenheid, het luisterend oor, de prikkelende

filosofische beschouwingen, oppeppende gesprekken en alle inspanningen om het onderzoek

op de rails te houden. Het was soms nodig op de rem te trappen, zodat ik niet uit de bocht zou

vliegen. Zonder zijn bijstand zou de promotie niet meer dan een onbereikbaar ideaal zijn

gebleven. Het vergt het penseel van een groot schilder om uiting te geven aan de dank die ik

hem verschuldigd ben.

Behalve mijn promotoren mogen zeker Peter Kavelaars en Deloitte Belastingadviseurs niet

onbenoemd blijven. Dankzij Peters goedheid en liefde voor de belastingwetenschap kon ik

academie en praktijk combineren. Hij ontsloot het positieve belastingrecht en bood een

inspirerende en warme omgeving om de eerste schreden in belastingland te zetten. Mede door

hem is dit proefschrift mogelijk gemaakt. Zijn kritische en heldere kijk op zaken is ook in de

2 Vrij naar John Steinbeck, Travels with Charley: In Search of America, 1962.

The Tax Tectonics

p. viii

laatste van fase van het onderzoek van onschatbare waarde gebleken. Ik ben hem veel

verschuldigd.

Een proefschrift besluit een academische studie. Beide zijn mogelijk gemaakt door het Fiscaal

Instituut Tilburg (FIT). Was het reeds een voorrecht onderwijs te genieten van Tilburgse

fiscalisten, als collega onder hen te verkeren was een superprivilege. Het FIT heeft een warm

en inspirerend onderwijs- en onderzoeksklimaat geboden. Ik dank alle medewerkers en

oud-medewerkers die op enigerlei wijze bij dit proefschrift betrokken zijn geweest, waaronder,

doch niet uitsluitend, Peter Essers, Richard Happé, Eric Kemmeren, Ronald Russo, Inge van

Vijfeijken, Esther Bakker, Sonja Dusarduijn, Frank Elsweier, Andrea Feldhoffer, Mascha

Hoogeveen, Diana van Hout en Caroline Toebosch.

Dank gaat ook uit naar de CentER Graduate School voor het aanbieden en faciliteren van een

aio-positie. De CentER Graduate Office dank ik voor alle logistiek en inspanningen om van een

eerste manuscript via de pre-defense te komen tot een boek in gedrukte vorm.

Een inspirerende omgeving heeft ook geboden de Hoge Raad der Nederlanden. Daar heb ik

mijn manuscript kunnen voltooien. Dat was niet gelukt zonder de goedheid van “mijn”

raadsheer, Theo Groeneveld. Hij is niet alleen op juridisch gebied een voorbeeld. Ook dank ik

Bea van Everdingen, “mijn” A-G’s en collega’s van het Wetenschappelijk Bureau voor hun

begrip en geduld. Als promovendus leeft men een kluizenaarsbestaan. Coen Maas dank ik voor

taalkundig advies. Ik wil niet onvermeld laten lichtingsgenoten Vincent Meijerman en

Thomas Bart Fijnheer. Mijn geweeklaag was soms een koude douche. “Ons” warme bad

verdreef de rillingen echter keer op keer. Nu wordt het tijd eindelijk eens die slingers op te

hangen…

Dat brengt mij op alle familieleden en vrienden die met mij – nu eens op afstand, dan weer van

dichtbij – het proefschrift tot wasdom hebben zien komen. Zoals ieder groeiproces, ging dat

met horten en stoten. Hun heb ik dan ook helaas niet de tijd en aandacht kunnen geven die ik

wilde. De lijst van betrokkenen is ellenlang. Mijn dankzegging is daarom per definitie

incompleet. Ik noem in ieder geval mijn moeder, Theo, Wessel, Manten, Mike, Bas, Lennert,

Martijn, Patrick, Michiel, Teun, en de Wolfpack.

Woorden vertolken een boodschap. Die boodschap vereist de juiste taal en toonzetting.

Daarvoor hebben Mariëlle Klein en René Neve zorggedragen. Zij belichamen de taalkundige

Voorwoord

p. ix

mortel die dit bouwwerk bijeenhoudt. De metselaars van woordwonderen. Woorden schieten

echter tekort om de lof en dankbaarheid die hun toekomt uit te drukken.

Woorden werden gewogen door de leden van de promotiecommissie, naar wie ook grote dank

uitgaat. Niet alleen voor het lezen, becommentariëren en nuanceren van het eerdere manuscript,

maar ook voor hun betrokkenheid bij het onderzoek. Het is een eer dat Gert-Jan van Norden,

Bruno Peeters, Peter Kavelaars, voornoemd, Henk Vording en Arjan Lejour hun goedkeuring

aan het manuscript hebben gegeven.

De afronding van dit proefschrift is mede mogelijk gemaakt door financiële ondersteuning van

de Nederlandse Vereniging voor Internationaal Belastingrecht, waarvoor ik ook mijn dank en

waardering wil uitspreken.

Laurens Wijtvliet

Den Haag, februari 2018

The Tax Tectonics

p. x


Preface

xi

Preface (in English)

A PhD’s journey is often said to be a solitary course, but I beg to differ. To quote Steinbeck, it

is “like a full dinner of many courses, set before a starving man. At first he tries to eat all of

everything, but as the meal progresses he finds he must forgo some things to keep his appetite

and his taste buds functioning.”3 And sharing dinner is what people do, because it makes a meal

a feast. Table companions prevent a PhD student from biting off more than they can chew.

Without them, the dish would be a welter of words devoid of smell or aroma. A PhD student

learns their lessons not only from experience – they are not self-taught. Masters and companions

lead them to their final destination, and theirs is this PhD thesis.

Masters merit praise. First and foremost my supervisor, Arie Rijkers. Without his trust, efforts,

advice, patience, inspiring world view, and friendship I never would have embarked on this

journey, much less have completed it. He kept a steady course and was a beacon of warmth and

light in dire times. His lessons are not only academic, they are lessons in life that have enriched

me forever. Words are just a unidimensional reflection of the gratitude that befits him – they

can never do justice to it.

I also thank my supervisor Hans Gribnau for his commitment, responsiveness, inciting

philosophical contemplations, pep talks, and all his endeavours to keep the research on track.

Sometimes he had to slow me down and prevent me from going astray. Without his support my

PhD would have remained a utopian ideal. Only the stroke of a great artist could express the

immense gratitude I owe him.

Apart from my supervisors, a special word of mention for Peter Kavelaars and Deloitte Tax

Advisors. Peter’s kindness and love for tax studies have enabled me to combine academia and

practice. He opened up the world of tax law for me, providing the inspiring and warm climate

where I entered the realm of taxation. This thesis also came about under his aegis. His critical

and crystal clear views certainly proved their worth in the last phase of this research and I owe

him a great debt of gratitude.

3 Inspired by John Steinbeck, Travels with Charley: In Search of America, 1962.

The Tax Tectonics

p. xii

A thesis marks the end of an academic study. The Fiscal Institute Tilburg (FIT) made both

possible. Being educated by Tilburg University tax experts was an honor already, working

amongst them as a colleague was a great privilege. The FIT offered a warm and inspiring

academic and research climate. I thank all of its present and former staff members who have

been involved in this thesis in any way, including – but not limited to – Peter Essers, Richard

Happé, Eric Kemmeren, Ronald Russo, Inge van Vijfeijken, Esther Bakker, Sonja Dusarduijn,

Frank Elsweier, Andrea Feldhoffer, Mascha Hoogeveen, Diana van Hout, and Caroline

Toebosch.

Moreover, I would like to thank the CentER Graduate School for providing and facilitating my

PhD position. I am grateful to the CentER Graduate Office for all their logistic and other efforts

to convert my first manuscript through the pre-defense into a book in print.

The Supreme Court of the Netherlands also provided a most inspiring environment for me to

complete my manuscript. This would not have been possible without the kindness of “my”

justice, Theo Groeneveld. He is a role model, not only in the legal field. I also thank Bea van

Everdingen, “my” advocates general, and my colleagues of the Tax Research Centre

(“Wetenschappelijk Bureau”) for their understanding and patience. A PhD student leads a

hermit’s life. I thank Coen Maas for linguistic support. My colleagues Vincent Meijerman and

Thomas Bart Fijnheer certainly deserve a word of mention for lending an ear to my

lamentations. Our companionship time and again lifted my spirits.

A special word of thanks to my family and friends who witnessed the growth of this thesis,

either from up close or from a distance. Like any growth process, it had its ups and downs and

I have not always been able to give them the time and attention they deserve. Their list of names

is endless and my gratitude goes way beyond it. In any case I would like to thank my mother,

Theo, Wessel, Manten, Mike, Bas, Lennert, Martijn, Patrick, Michiel, Teun, and the Wolfpack.

Words ideally convey a clear message and strike the right tone. Mariëlle Klein and René Neve

provided the linguistic mortar that holds together the structure of my thesis. Words are not

enough to thank them.

I would further like to extend my great gratitude to the Members of the PhD committee who

consciously weighed my words. I thank them not only for reading and commenting on the

manuscript, but most of all for their involvement in the research. It is an honor that Gert-Jan

Preface

p. xiii

van Norden, Bruno Peeters, Peter Kavelaars, Henk Vording, and Arjan Lejour approved the

manuscript.

The completion of this thesis has also been made possible with financial support of the Dutch

IFA Branch, for which I am also very grateful.

Laurens Wijtvliet

The Hague, February 2018

The Tax Tectonics

p. xiv


Condensed table of contents

xv

Condensed table of contents

Voorwoord (in Dutch) ............................................................................................................ vii

Preface (in English) ................................................................................................................. xi

Condensed table of contents .................................................................................................. xv

Comprehensive table of contents ........................................................................................ xvii

List of abbreviations ............................................................................................................ xxxi

0 A bird’s eye view of this thesis ........................................................................................ 1

1 Prologue: tax tides ............................................................................................................ 7

2 A shifting balance ........................................................................................................... 29

3 Consumption tax versus indirect tax on consumption ................................................ 69

4 Research question and hypothesis ................................................................................ 85

5 Research methodology and outline ............................................................................... 93

6 Direct and indirect taxes: why distinguish? ............................................................... 107

7 Direct and indirect taxes: how to distinguish? .......................................................... 129

8 Towards a working definition of direct and indirect taxes ...................................... 171

9 An anatomy of the tax mix .......................................................................................... 183

10 On the tax burden ........................................................................................................ 221

11 Well-being, taxation, and tax principles: a normative synthesis ............................. 273

12 Tax instrumentalism and well-being: a theoretical perspective .............................. 335

13 Economic inequality and well-being: an instrumental perspective ......................... 371

14 Tax instrumentalism: a distribution analysis ............................................................ 443

15 The distribution effects of a shift to indirect taxes: an empirical model ................. 481

16 Building bridges between theory and practice .......................................................... 573

17 Summary, conclusions, and answer to the research question .................................. 587

List of works cited and referenced ...................................................................................... 629

Online appendices ................................................................................................................ 681

The Tax Tectonics

p. xvi


Comprehensive table of contents

p. xvii


Voorwoord (in Dutch) ............................................................................................................ vii

Preface (in English) ................................................................................................................. xi

Condensed table of contents .................................................................................................. xv

Comprehensive table of contents ........................................................................................ xvii

List of abbreviations ............................................................................................................ xxxi

0 A bird’s eye view of this thesis ........................................................................................ 1

1 Prologue: tax tides ............................................................................................................ 7

Reflections of societal dynamics .............................................................................. 9

Expenditures emerge .............................................................................................. 10

The first sprouts of excise taxes ............................................................................ 11

The bitter taste of salt tax ...................................................................................... 14

A move away from excise taxes ............................................................................. 17

The 1821 System Act (Stelselwet) ..................................................................... 17

Social and economic developments ................................................................... 21

Towards an income tax .......................................................................................... 22

Confluence: the field of forces between direct and indirect taxes ..................... 24

Conclusion ............................................................................................................... 28

2 A shifting balance ........................................................................................................... 29

Drivers of change .................................................................................................... 31

General ................................................................................................................ 31

Improve competitiveness and boost economic growth.................................... 32

Some taxes are more distortionary than others: theory and empirics .......... 33

Old wine in new bottles? ........................................................................................ 36

A critical look at the tax shift’s theoretical and empirical underpinnings ....... 40

Dynamic and static efficiency ............................................................................ 40

Long run: less distortionary, growth-oriented tax systems ............................ 41

2.3.2.1 The plausibility of the OECD “tax and economic growth ranking” ...................... 41

2.3.2.2 Taxes and the determinants of growth .................................................................... 43

The Tax Tectonics

p. xviii

2.3.2.3 Conclusion: no unequivocal evidence..................................................................... 44

Short run: the theory and empirics of fiscal devaluation ............................... 44

2.3.3.1 Introduction ............................................................................................................ 44

2.3.3.2 Fiscal devaluation in a theoretical nutshell ............................................................ 45

2.3.3.2.1 Promoting employment ...................................................................................... 45

2.3.3.2.2 Improving competitiveness and the trade balance ............................................. 46

2.3.3.2.3 Unilateral and multilateral fiscal devaluations ................................................... 48

2.3.3.2.4 Rigidity requirements ......................................................................................... 48

2.3.3.3 Fiscal devaluation: empirical literature ................................................................. 49

2.3.3.4 The consortium’s empirical and model results ....................................................... 54

2.3.3.4.1 General ............................................................................................................... 54

2.3.3.4.2 Unilateral fiscal devaluation: short-run results .................................................. 54

2.3.3.4.3 Unilateral fiscal devaluation: long-run results ................................................... 55

2.3.3.4.4 Multilateral fiscal devaluations: macro-simulations .......................................... 56

2.3.3.5 What we know about fiscal devaluation: high stakes, tiny gains ............................ 57

Conclusion: what we know about tax shifts ..................................................... 57

When worlds collide: welfare versus well-being .................................................. 59

In the one corner: GDP, ruler of the roost? ..................................................... 59

In the other corner: well-being, challenging the size of the pie ...................... 60

2.4.2.1 A spreading disease? .............................................................................................. 60

2.4.2.2 An end in itself or merely a means to an end? ........................................................ 64

2.4.2.3 Multidimensional well-being .................................................................................. 66

Consideration: from welfare to well-being .......................................................... 68

3 Consumption tax versus indirect tax on consumption ................................................ 69

Introduction ............................................................................................................ 71

The Meade report ................................................................................................... 71

The consumption tax in Dutch tax literature....................................................... 74

The Mirrlees Review .............................................................................................. 79

The tax base as a function of that which is socially just ..................................... 81

4 Research question and hypothesis ................................................................................ 85

5 Research methodology and outline ............................................................................... 93

Research methodology ........................................................................................... 97

General outline ....................................................................................................... 97


p. xix

Part A: conceptual framework .............................................................................. 98

Part B: empirical analysis.................................................................................... 100

Part C: connecting the dots: an answer to the research question .................... 101

Research limitations ............................................................................................. 102

General .............................................................................................................. 102

Limitations to the tax mix ................................................................................ 102

Limitations to the empirical model ................................................................. 103

Economic inequality and well-being ............................................................... 105

6 Direct and indirect taxes: why distinguish? ............................................................... 107

Introduction: a changeling? ................................................................................ 111

Uses of the dichotomy direct-indirect ................................................................. 116

A European problem child: tax harmonization ............................................ 116

The World Trade Organization ...................................................................... 118

The Organisation for Economic Cooperation and Development ................. 120

Constitutional consequences............................................................................ 121

6.2.4.1 The US direct tax clauses ...................................................................................... 121

6.2.4.2 North of the border ............................................................................................... 124

6.2.4.3 Switzerland ............................................................................................................ 125

Limits to the tax burden .................................................................................. 125

Judicial dimension ............................................................................................ 126

Conclusion ............................................................................................................. 127

7 Direct and indirect taxes: how to distinguish? .......................................................... 129

Introduction .......................................................................................................... 131

Ghosts from the past ............................................................................................ 133

A newcomer to the tax law family ................................................................... 133

Social, political and normative connotations ................................................. 136

7.2.2.1 Introduction .......................................................................................................... 136

7.2.2.2 Taxation in the New World: direct taxes as a response to the rise of large fortunes .

.............................................................................................................................. 137

7.2.2.3 Direct taxes and democracy .................................................................................. 139

7.2.2.4 Stealth or out in the open? .................................................................................... 140

The Tax Tectonics

p. xx

Consideration .................................................................................................... 142

Legal and administrative classifications ............................................................ 143

Introduction ...................................................................................................... 143

Designated as such by the legislator ............................................................... 143

Administrative and departmental classifications .......................................... 145

7.3.3.1 Discussion ............................................................................................................. 145

7.3.3.2 Summary ............................................................................................................... 149

Consideration .................................................................................................... 149

Economic classifications ...................................................................................... 151

Tax incidence .................................................................................................... 151

Intended incidence ............................................................................................ 154

Social aspects .................................................................................................... 155

Consideration .................................................................................................... 158

A different approach: ability to pay ................................................................... 160

7.5.1.1 Discussion ............................................................................................................. 160

7.5.1.2 Summary ............................................................................................................... 167

Conclusion ............................................................................................................. 169

8 Towards a working definition of direct and indirect taxes ...................................... 171

Introduction .......................................................................................................... 173

Sailing through the Symplegades safely ............................................................. 175

Concluding comments .......................................................................................... 180

9 An anatomy of the tax mix .......................................................................................... 183

Introduction .......................................................................................................... 187

The tax mix at a glance ........................................................................................ 189

General overview of Dutch national taxes ..................................................... 189

Overview of the Dutch national tax mix......................................................... 190

The tax mix dissected ........................................................................................... 199

General .............................................................................................................. 199

Value Added Tax (VAT) (belasting over de toegevoegde waarde, btw,

omzetbelasting) .............................................................................................................. 199


p. xxi

Wage and personal income tax (loon- en inkomstenbelasting) ..................... 200

Social security contributions (premies wettelijke sociale verzekeringen) and

national insurance contributions (premies volksverzekeringen) ............................... 201

Corporate income tax (vennootschapsbelasting) ............................................ 203

Excise taxes (accijnzen) .................................................................................... 204

Environmental consumer taxes (verbruiksbelastingen op milieugrondslag) 205

Environmental taxes (milieuheffingen) .......................................................... 206

Motor vehicle tax (motorrijtuigenbelasting) ................................................... 207

Tax on passenger cars and motor vehicles (belasting van personenauto’s en

motorrijwielen, BPM) .................................................................................................... 208

Real estate transfer tax (overdrachtsbelasting) .......................................... 209

Dividend tax (dividendbelasting) ................................................................. 209

Capital taxes (vermogensheffingen) ............................................................ 210

Insurance tax (assurantiebelasting) ............................................................. 211

Lottery tax, tax on games of chance (kansspelbelasting) ........................... 212

Bank levy (bankenbelasting) ........................................................................ 213

Landlord levy (verhuurderheffing) ............................................................. 213

Other levies on wages (loonkostenheffing) ................................................. 214

Consumer tax on non-alcoholic beverages (verbruiksbelasting van

alcoholvrije dranken) .................................................................................................... 215

Tax on stocks of petroleum products (voorraadheffing aardolieproducten) ..

........................................................................................................................ 216

What about the consumption or expenditure tax? ............................................ 217

Conclusion ............................................................................................................. 218

10 On the tax burden ........................................................................................................ 221

Introduction .......................................................................................................... 223

Nomenclature: of progression, regression and proportionality ....................... 228

A mapping of the tax burdens – indirect taxes .................................................. 231

Introduction .................................................................................................. 231

The burdens of indirect taxes ...................................................................... 232

The Tax Tectonics

p. xxii

10.3.2.1 The combined, overall burden of indirect taxes .................................................... 232

10.3.2.2 The burden of the VAT .......................................................................................... 237

10.3.2.3 The burden of the consumer tax on non-alcoholic beverages............................... 240

10.3.2.4 The burden of excise taxes .................................................................................... 242

10.3.2.5 The burden of environmental consumer taxes ...................................................... 244

10.3.2.6 The burden of the insurance tax ............................................................................ 246

10.3.2.7 Summary: indirect taxes are regressive in proportion to gross income ............... 248

Other indirect taxes ...................................................................................... 249

Conclusion ..................................................................................................... 250

Household expenditures in proportion to income ............................................. 251

The burdens of direct taxes ................................................................................. 257

Introduction .................................................................................................. 257

The personal income tax and national insurance contributions .............. 257

10.5.2.1 Revenues and shares of direct taxes ..................................................................... 257

10.5.2.2 Tax burdens ........................................................................................................... 258

Other direct taxes ......................................................................................... 266

10.5.3.1 Introduction .......................................................................................................... 266

10.5.3.2 A qualitative analysis of the corporate income tax burden................................... 267

Concluding comments .................................................................................. 270

Conclusion ............................................................................................................. 271

11 Well-being, taxation, and tax principles: a normative synthesis ............................. 273

Introduction .......................................................................................................... 275

Disputing the undisputed champion: from GDP to well-being ........................ 279

Pars pro toto? ............................................................................................... 279

To infinity and beyond!................................................................................ 286

Well-being ............................................................................................................. 289

... its facets, domains, dimensions and indicators ...................................... 289

… its definition ............................................................................................. 293

The search for linkages between dimensions of well-being through the tax

system ........................................................................................................................ 294

The meaning of legal values and distributive principles for well-being .......... 298


p. xxiii

On distributive justice in taxation: ability to pay and the principle of

equality ........................................................................................................................ 298

11.4.1.1 Legal principles .................................................................................................... 298

11.4.1.2 Tax distribution principles .................................................................................... 300

11.4.1.3 Axiomatic adoption ............................................................................................... 302

11.4.1.4 Gleichbelastung .................................................................................................... 304

11.4.1.5 Wrap up ................................................................................................................. 308

Ability to pay expounded ............................................................................. 308

11.4.2.1 Its definition .......................................................................................................... 308

11.4.2.2 Its legal status ....................................................................................................... 309

11.4.2.3 Its historical roots ................................................................................................. 310

11.4.2.4 Its evolution ........................................................................................................... 311

11.4.2.5 Its purest appearance: comprehensive income ..................................................... 314

11.4.2.6 Its autonomous and empirical character and its implications for well-being ...... 320

11.4.2.7 Its critics ............................................................................................................... 324

11.4.2.7.1 Murphy and Nagel’s incorporation of government expenditures .................. 324

11.4.2.7.2 Infanti’s broader perspective of tax fairness .................................................. 326

11.4.2.7.2.1 Overview ................................................................................................ 326

11.4.2.7.2.2 Spheres of justice .................................................................................... 327

11.4.2.7.2.3 Other approaches to income? .................................................................. 329

11.4.2.8 Consideration ........................................................................................................ 330

Conclusion ............................................................................................................. 332

12 Tax instrumentalism and well-being: a theoretical perspective .............................. 335

Introduction and research questions .................................................................. 337

Tax instrumentalism and tax expenditures: tax law as an instrument of

government policy ............................................................................................................ 346

General .......................................................................................................... 346

Instrumentalism and ability to pay ............................................................. 349

Tax expenditures and the normal tax structure ........................................ 352

Well-being: justification and limitation of tax instrumentalism ...................... 357

Structural elements of the tax system ......................................................... 357

12.3.1.1 General ................................................................................................................. 357

12.3.1.2 Tax principles and the prevailing tax structure .................................................... 358

12.3.1.3 Structural elements ............................................................................................... 360

The Tax Tectonics

p. xxiv

12.3.1.4 Consideration ........................................................................................................ 361

Limitation ...................................................................................................... 362

12.3.2.1 The role of Gleichbelastung .................................................................................. 362

12.3.2.2 A hierarchy of tax principles ................................................................................. 365

12.3.2.3 A harmonious whole ............................................................................................. 367

Conclusion ............................................................................................................. 368

13 Economic inequality and well-being: an instrumental perspective ......................... 371

Introduction .......................................................................................................... 373

Economic inequality: why ................................................................................... 378

Overview of arguments advanced in favor of economic inequality ......... 378

Inequality is only a temporal phenomenon: Kuznets’ contribution ........ 378

A spur to economic growth and private initiative ..................................... 380

Savings and concentrations of wealth as a prerequisite for investment and

economic growth ........................................................................................................... 386

Concluding comments .................................................................................. 389

Excessive economic inequality: why not ............................................................. 390

Overview of arguments advanced against excessive economic inequality ....

........................................................................................................................ 390

Societal dysfunctionalities ............................................................................ 392

13.3.2.1 Positional concerns ............................................................................................... 392

13.3.2.2 The devolution of inequality .................................................................................. 396

Economic growth .......................................................................................... 401

13.3.3.1 Empirics: a counterbalance to conventional views .............................................. 401

13.3.3.1.1 Inequality and economic growth .................................................................... 401

13.3.3.1.2 Taxes and growth ........................................................................................... 405

13.3.3.1.3 Entrepreneurship and taxation ....................................................................... 407

13.3.3.1.4 To summarize ................................................................................................. 409

13.3.3.2 Shortfalls in aggregate consumption .................................................................... 410

13.3.3.3 Private debts ......................................................................................................... 411

13.3.3.4 Market power and anti-competitive behavior ....................................................... 412

13.3.3.5 Underinvestment and rent-seeking........................................................................ 414

Democratic deficiencies ................................................................................ 417

13.3.4.1 Introduction: an inverse relationship between inequality and democracy? ......... 417


p. xxv

13.3.4.2 Media independence ............................................................................................. 419

13.3.4.3 Political independence and influence ................................................................... 420

13.3.4.4 Campaign finance and donations ......................................................................... 423

13.3.4.5 The threat of corporate relocation and fiscal fatalism ......................................... 425

13.3.4.6 Three concerns with corporate wealth in politics ................................................. 427

Concluding comments: the miasma of economic inequality .................... 428

The causes of growing economic inequality ....................................................... 431

Conclusion ............................................................................................................. 438

14 Tax instrumentalism: a distribution analysis ............................................................ 443

Introduction .......................................................................................................... 445

The inequality dimension of indirect tax instrumentalism ............................... 449

14.2.1.1 The research hypothesis revisited ......................................................................... 449

14.2.1.2 Empirical literature .............................................................................................. 450

14.2.1.2.1 General ........................................................................................................... 450

14.2.1.2.2 Belgium: Decoster and Van Camp ................................................................. 450

14.2.1.2.3 Australia: the Costello proposals ................................................................... 453

14.2.1.2.4 New Zealand: a single-rate, broad base GST versus reduced rates ............... 453

14.2.1.2.5 The funding of Rhineland welfare states and austerity measures .................. 454

14.2.1.3 Conclusion and consideration: lessons learned ................................................... 455

The inequality dimension of direct tax instrumentalism .................................. 458

Direct tax instrumentalism: preferential tax rates ............................................ 460

General .......................................................................................................... 460

Dual Income Tax .......................................................................................... 460

Income from savings and investments: the Netherlands .......................... 462

Real estate transfers ..................................................................................... 467

Conclusion and consideration: lessons learned ......................................... 467

Direct tax instrumentalism: limitations of the tax base .................................... 469

General .......................................................................................................... 469

Entrepreneurs: business transfer facilities ................................................ 469

Gifts benefiting home ownership ................................................................ 472

The façade easement deduction .................................................................. 473

Recap ............................................................................................................. 475

The Tax Tectonics

p. xxvi

Consideration and conclusion ............................................................................. 476

Lessons learned: a twofold interaction between income taxes and economic

inequality ....................................................................................................................... 476

Conclusion: towards a more equal tax treatment of income .................... 479

15 The distribution effects of a shift to indirect taxes: an empirical model ................. 481

Introduction .......................................................................................................... 483

Methodology ......................................................................................................... 487

Model aim and description .......................................................................... 487

15.2.1.1 Introduction .......................................................................................................... 487

15.2.1.2 Taxes covered ....................................................................................................... 488

15.2.1.3 Disposable income and household expenditures .................................................. 489

15.2.1.4 The model’s core: a largely static setting and the uses of income ........................ 489

15.2.1.5 Macro and micro part ........................................................................................... 491

15.2.1.6 Data and definitions from Statistics Netherlands ................................................. 491

Macro-part .................................................................................................... 494

15.2.2.1 Outline: the baseline tax revenues ........................................................................ 494

15.2.2.2 Outline: the model’s VAT rate .............................................................................. 495

15.2.2.3 Recap and additional assumptions ....................................................................... 498

15.2.2.4 Across the board tax shift ..................................................................................... 499

Micro-part ..................................................................................................... 499

15.2.3.1 Outline .................................................................................................................. 499

15.2.3.2 Average households .............................................................................................. 501

15.2.3.3 Systematics ............................................................................................................ 505

15.2.3.4 A numerical example............................................................................................. 507

Description of the main model results: household savings ............................... 514

Outline ........................................................................................................... 514

The baseline .................................................................................................. 515

Average households 1 through 6: observations and highlights ................ 518

15.3.3.1 General ................................................................................................................. 518

15.3.3.2 Households 1 and 2 ............................................................................................... 518

15.3.3.3 Households 3 through 6 ........................................................................................ 524

15.3.3.4 Intermediate conclusion average households 1 through 6 ................................... 529

Average household 7 .................................................................................... 529


p. xxvii

15.3.4.1 General ................................................................................................................. 529

15.3.4.2 Intermediate conclusion average household 7 ...................................................... 534

Average households 8 through 10 ............................................................... 534

15.3.5.1 General ................................................................................................................. 534

15.3.5.2 Intermediate conclusion average households 8-10 ............................................... 539

Conclusion and answer to subquestion 1 ................................................... 539

Description of the main model results: the distribution of wealth .................. 542

Outline ........................................................................................................... 542

The baseline scenario ................................................................................... 543

15.4.2.1 Overview: increasing wealth inequality in the baseline ....................................... 543

15.4.2.2 Average households 1 through 6 ........................................................................... 546

15.4.2.3 Average households 7 through 10 ......................................................................... 546

15.4.2.4 Intermediate conclusion baseline ......................................................................... 547

Shifting from direct to indirect taxes .......................................................... 549

15.4.3.1 Overview ............................................................................................................... 549

15.4.3.2 Average households 1 through 7 ........................................................................... 551

15.4.3.3 Average households 8 through 10 ......................................................................... 554

Conclusion and answer to subquestion 2 ................................................... 556

What drives model results? A critical analysis of outcomes ............................ 559

Introduction .................................................................................................. 559

An analysis of the model’s drivers and assumptions ................................ 559

15.5.2.1 The identity Y = C + S and the accompanying assumptions ................................ 559

15.5.2.2 Consumption and savings quotes: drivers of the model outcomes ....................... 560

15.5.2.3 The design of a tax shift matters ........................................................................... 561

15.5.2.4 Distribution and differentiated VAT rates ............................................................ 564

15.5.2.5 What about the distributive impact of the corporate income tax? ........................ 565

15.5.2.6 The impact of the interest rate on model outcomes .............................................. 565

15.5.2.7 What causes the model’s comparatively limited impact on the distribution of wealth?

.............................................................................................................................. 568

Conclusion and answer to the research question .............................................. 570

16 Building bridges between theory and practice .......................................................... 573

Introduction .......................................................................................................... 575

Capita selecta: the various proposals in the light of Gleichbelastung.............. 578

The Tax Tectonics

p. xxviii

Overview: base broadening + rate reduction = economic growth ........... 578

Base broadening… ....................................................................................... 579

16.2.2.1 Deductions and other limitations of the tax base begone! .................................... 579

16.2.2.2 The substantial interest shareholder as a hub of imbalances ............................... 580

16.2.2.3 The labor-capital dichotomy remains untouched ................................................. 583

16.2.2.4 Base broadening in indirect taxes: higher and more uniform VAT rates ............. 584

Analysis and evaluation: the knife cuts multiple ways ..................................... 585

Conclusion ............................................................................................................. 586

17 Summary, conclusions, and answer to the research question .................................. 587

Prologue: tax tides (Chapters 0 and 1) ............................................................... 589

A shifting balance: the reasons for this research (Chapter 2) .......................... 590

Drivers of change .......................................................................................... 590

The theory and empirics of the tax shift .................................................... 590

When worlds collide: welfare versus well-being ........................................ 591

Research question and hypothesis (Chapter 4) ................................................. 593

Research methodology and outline (Chapter 5) ................................................ 595

Conceptual and empirical parts .................................................................. 595

Research limitations ..................................................................................... 595

17.4.2.1 General ................................................................................................................. 595

17.4.2.2 Limitations to the tax mix ...................................................................................... 595

17.4.2.3 Limitations to the empirical model ....................................................................... 596

17.4.2.4 A descriptive, evaluative, and conceptual approach to well-being and inequality596

Summary and main findings ............................................................................... 598

General .......................................................................................................... 598

The conceptual part ..................................................................................... 598

17.5.2.1 The dichotomy direct-indirect (Chapters 6 and 7) ................................................ 598

17.5.2.1.1 General ........................................................................................................... 598

17.5.2.1.2 Direct and indirect taxes: why distinguish? (Chapter 6) ................................ 598

17.5.2.1.3 Direct and indirect taxes: how to distinguish? (Chapter 7) ............................ 599

17.5.2.2 Towards a working definition of direct and indirect taxes (Chapter 8) ............... 600

17.5.2.3 An anatomy of the tax mix (Chapter 9) ................................................................. 601

17.5.2.4 On the tax burden (Chapter 10) ............................................................................ 602

17.5.2.5 Well-being, taxation, and tax principles: a normative synthesis (Chapter 11)..... 604


p. xxix

17.5.2.6 Tax instrumentalism and well-being: a theoretical perspective (Chapter 12)...... 608

17.5.2.7 Economic inequality and well-being: an instrumental perspective (Chapter 13) 610

17.5.2.7.1 General ........................................................................................................... 610

17.5.2.7.2 Arguments in support of economic inequality ............................................... 610

17.5.2.7.3 Arguments against excessive economic inequality ........................................ 611

The empirical part ........................................................................................ 614

17.5.3.1 Fertilizing the fields of inequality (Chapters 14 through 16) ............................... 614

17.5.3.2 Tax instrumentalism: a distribution analysis (Chapter 14) .................................. 614

17.5.3.2.1 General ........................................................................................................... 614

17.5.3.2.2 Lessons learned .............................................................................................. 615

17.5.3.2.3 Twofold interaction ........................................................................................ 615

17.5.3.3 The distribution effects of a shift to indirect taxes: an empirical model (Chapter 15)

.............................................................................................................................. 617

17.5.3.3.1 General ........................................................................................................... 617

17.5.3.3.2 Model outcomes ............................................................................................. 617

17.5.3.3.3 The model’s drivers and assumptions: lessons learned .................................. 618

17.5.3.3.4 Towards an integrated assessment of economic and tax policy ..................... 620

17.5.3.4 Building bridges between theory and practice (Chapter 16) ................................ 621

Connecting the dots: conclusions and recommendations ................................. 622

The research question answered ................................................................. 622

Recommendation: systemize the income tax first ..................................... 623

Recommendation: consider the system as a whole .................................... 624

Recommendation: an integral assessment of proposals for reform ........ 624

Recommendations for future research ............................................................... 626

General .......................................................................................................... 626

The tax mix ................................................................................................... 626

The empirical model ..................................................................................... 626

Economic inequality and well-being ........................................................... 627

List of works cited and referenced ...................................................................................... 629

A. ........................................................................................................................................ 631

B. ........................................................................................................................................ 633

C. ........................................................................................................................................ 637

D. ........................................................................................................................................ 640

The Tax Tectonics

p. xxx

E. ........................................................................................................................................ 641

F. ........................................................................................................................................ 643

G. ........................................................................................................................................ 645

H. ........................................................................................................................................ 648

I. ......................................................................................................................................... 651

J. ......................................................................................................................................... 652

K. ........................................................................................................................................ 654

L. ........................................................................................................................................ 656

M. ....................................................................................................................................... 657

N. ........................................................................................................................................ 661

O. ........................................................................................................................................ 662

P. ........................................................................................................................................ 664

Q. ........................................................................................................................................ 666

R. ........................................................................................................................................ 666

S. ......................................................................................................................................... 668

T. ........................................................................................................................................ 675

U. ........................................................................................................................................ 676

V. ........................................................................................................................................ 676

W. ....................................................................................................................................... 677

X. ........................................................................................................................................ 679

Y. ........................................................................................................................................ 680

Z. ........................................................................................................................................ 680

Online appendices ................................................................................................................ 681

List of abbreviations

p. xxxi


Ala. L. Rev. Alabama Law Review

Am. J. Int’l L. American Journal of International Law

Am. J. Tax Pol'y American Journal of Tax Policy

ASCM Agreement on Subsidies and Countervailing

Measures

B.C. L. Rev. Boston College Law Review

BNB Beslissingen Nederlandse Belastingrechtspraak

Brit. J. Am. Legal Stud. British Journal of American Legal Studies

BTA Border Tax Adjustment

Cato Sup. Ct. Rev. Cato Supreme Court Review

CBO Congressional Budget Office

CIT Corporate Income Tax

CITA Corporate Income Tax Act

CJEU Court of Justice of the European Union

CMEPSP Commission on the Measurement of Economic

Performance and Social Progress

Colum. L. Rev. Columbia Law Review

Colum. L. Rev. Sidebar Columbia Law Review Sidebar

Const. Comment. Constitutional Commentary

EC European Community

The Tax Tectonics

p. xxxii

EU European Union

FE European Foundation (Fundatio Europaea)

Fla. Tax Rev. Florida Tax Review

Fordham L. Rev. Fordham Law Review

FTT Financial Transaction Tax

FutD Fiscaal up to Date

Ga. J. Int’l & Comp. L. Georgia Journal of International and

Comparative Law

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Product

GST Goods and Services Tax

Harv. L. & Pol'y Rev. Harvard Law & Policy Review

Harv. L. Rev. Harvard Law Review

Harv. L. Rev. F. Harvard Law Review Forum

Howard L.J. Howard Law Journal

IMF International Monetary Fund

Ind. L.J. Indiana Law Journal

J. Econ. Growth Journal of Economic Growth

MBB Maandblad Belasting Beschouwingen

Mich. L. Rev. Michigan Law Review

MP Member of Parliament

Neb. L. Rev. Nebraska Law Review


p. xxxiii

N.Y.U. L. Rev. New York University Law Review

NGO Non-Governmental Organization

NTFR Nederlands Tijdschrift voor Fiscaal Recht

Nw. U. L. Rev. Northwestern University Law Review

OECD Organisation for Economic Co-operation and

Development

Ohio N.U. L. Rev Ohio Northern University Law Review

Pepp. L. Rev. Pepperdine Law Review

PIT Personal Income Tax

PITA Personal Income Tax Act

Q. J. Econ. Quarterly Journal of Economics

Real Prop. Prob. & Tr. J. Real Property, Probate and Trust Journal

S.M.U. L. Rev. SMU Law Review

Ssc Social Security Contributions

S. Tex. L. Rev. South Texas Law Review

St. Louis U. L.J. St. Louis University Law Journal

Suffolk U. L. Rev. Suffolk University Law Review

Taxes Taxes–The Tax Magazine

Tax L. Rev. Tax Law Review

TFEU Treaty on the Functioning of the European

Union

U. Balt. L. Rev. University of Baltimore Law Review

The Tax Tectonics

p. xxxiv

U. Chi. L. Rev. University of Chicago Law Review

U. Miami L. Rev. University of Miami Law Review

U. Pa. J. Const. L. University of Pennsylvania Journal of

Constitutional Law

US United States

Utah L. Rev. Utah Law Review

Vand. L. Rev. Vanderbilt Law Review

Va. L. Rev. Virginia Law Review

VAT Value Added Tax

Va. Tax Rev. Virginia Tax Review

V-N Vakstudie Nieuws

Vt. L. Rev. Vermont Law Review

Wage-Price L. & Econ. Rev. Wage-Price Law & Economics Review

WFR Weekblad Fiscaal Recht

Whittier L. Rev. Whittier Law Review

WM. & Mary Bill Rts. J. William and Mary Bill of Rights Journal

WTO World Trade Organization

Yale L.J. Yale Law Journal

--

0. A bird’s eye view of this thesis

p. 1

0 A bird’s eye view of this thesis

The Tax Tectonics

p. 2



p. 3

I am of the opinion that each novelist will in particular consider the first sentence of his

book, and that it is often hard to find a first sentence that is satisfactory. The first sentence

is an interesting issue which invokes questions [...]. I believe that the issue ‘first sentence’ is

of a relative recent date in the literature. Older writers did not worry too much about their

first sentences, and neither about their titles. They briefly indicated what the rest would be

about.

Willem Frederik Hermans (unofficial translation)4

4 Willem Frederik Hermans, Eerste Zinnen van Romans, in: Willem Frederik Hermans, Mondelinge

mededelingen, Amsterdam: Uitgeverij De Bezige Bij 1987, pp. 61-62.

The Tax Tectonics

p. 4



p. 5

This doctoral thesis is about well-being and wealth inequality in relation to a shift in the tax

mix from direct to indirect taxes.5 It analyzes the distributive effects of such a tax shift in the

light of a multidimensional notion of well-being. To that end a descriptive and evaluative

approach is combined with a very basic, exploratory empirical model. That combination is

realized according to the following main research question:

Could a shift in the tax mix from direct to indirect taxes affect the various dimensions of

well-being, most notably in relation to wealth inequality?

This research question contains several tax, economic, legal, philosophical and other themes.

In order for one to fully appreciate the purpose and scope of this research, a few of these themes

need to be clarified at this stage of this thesis – before the research question itself is further

explained. The following Chapters 1 up to and including 3 provide such clarification. Together

they form the prelude to the research question.

The prelude consists of the following parts. Chapter 1 (prologue) paints an historical picture of

the evolution of tax systems. It provides an historical view onto the field of forces between

direct and indirect taxes. That field of forces is still present. Today, it is predominantly

determined by considerations of economic growth. These aspects of economic growth and taxes

and their meaning for the tax shift to indirect taxes are discussed in Chapter 2.

The material pursuit of economic growth contrasts sharply with a more immaterial pursuit of

well-being that is experiencing a revival in the current economic literature. That immaterial

strive and the multidimensional notion of well-being it embodies are also discussed in

Chapter 2. Next, Chapter 3 discusses the so-called expenditure or consumption tax. This

(hypothetical) tax resembles the tax shift to indirect taxes and it may result in comparable side

effects to the distribution of wealth and well-being.

Chapters 1 through 3 pave the way for this thesis’ main research question and methodology:

Chapters 4 and 5. Chapter 4 contains a closer explanation of the main research question. The

research methodology and the outline of this thesis are discussed in Chapter 5.

--

5 In this thesis, this shift in the tax mix from direct to indirect taxes will also be dubbed “the shift from direct

to indirect taxes”, “the tax shift”, “the shift” or a derivate thereof.

The Tax Tectonics

p. 6


1. Prologue: tax tides

p. 7

1 Prologue: tax tides

The Tax Tectonics

p. 8



p. 9

Reflections of societal dynamics

The road to change is one of struggle and confrontation. This goes for mankind and its creations

alike – tax systems included. The evolution of taxation has been a search for the payment

capacity of taxpayers, the ability-to-pay principle, and direct and indirect taxes.

Grapperhaus strikingly compares this evolution to a pilgrimage: “a tough and frequently

dangerous journey in often rough weather and through unknown areas to a possibly hardly

achievable goal.”6 With this statement he follows in the footsteps of Seligman, who brackets

the “history of finance” together with “the evolution of the principle of faculty or ability to

pay—the principle that each individual should be held to help the state in proportion to his

ability to help himself.”7

Over the centuries, the benchmark for the ability to pay has also evolved. Seligman presents

five consecutive stages in which direct and indirect taxes alternate.8 That development is still

going on today. Initially, in the first societies, the census sufficed. That resulted in head taxes.

Later on, property became the base for a general property tax, until expenditures arose as the

distribution formula for excise taxes (special – indirect – taxes on consumption). Subsequently,

revenues approximated the payment capacity. They constituted the base for revenue taxes (taxes

réelles, Ertragsteuer, opbrengstbelastingen), until eventually income became the embodiment

of the ability to pay.

Seligman adds that tax reforms have historically been dictated by the self-interest of the ruling

class(es) who wanted to shift the tax burden onto others. That observation is a common thread

in the history of taxes. Shifting tax bases reflect a changing economic and societal balance of

power as well as “the efforts of each class, whether it be the small or the large class, to gain

6 Ferdinand H.M. Grapperhaus, De pelgrimstocht naar het draagkrachtbeginsel. Belastingheffing in

West-Europa tussen 800 en 1800, Zutphen: Walburg Pers/Kluwer 1993, p. 7.

7 Edwin R.A. Seligman, The Income Tax: A Study of the History, Theory and Practice of Income Taxation

at Home and Abroad, New York: The Macmillan Company 1914, p. 4.


at Home and Abroad, New York: The Macmillan Company 1914, pp. 5-18.

The Tax Tectonics

p. 10

some advantage for itself.”9 Among these attempts to shift the tax burden, the calls for tax

justice and tax equity are gradually increasing.10

Expenditures emerge

The aforementioned societal and economic dynamics were clearly visible at the beginning of

the Middle Ages, in the rising cities. There, under a governing elite of prospering citizens,

wealth taxes gave way to excise taxes, which were predominantly paid by the middle and lower

classes.11 The interest of the governing class was to shake off the tax burden and to shift it to

the poorer classes and the surrounding rural areas.12 The latter were usually left out of the

registers and were therefore immune to the prevailing wealth taxes. They therefore did not

contribute to the fisc. That was also the case for the nobility and the clergy, albeit because of

tax privileges. “No one can avoid expenditures”, the urban tax reformers must have thought.

And that also was the case for taxes thereon. Thus, excise taxes had a wide range to strike

commodities consumed by the majority of the population. They essentially covered the

population in its entirety.13 For many centuries, excise taxes therefore remained efficient and

effective means. The “Ideal der Akzise” still existed in the time of Adam Smith, who applauded

excise taxes on luxury goods.14

Besides a desire to shift the tax burden, other factors also pushed this change of the medieval

tax landscape. Ydema, for instance, provides a budgetary argument. The urban authorities

simply could not afford to exempt low income individuals and families from taxation. In line

with that is a notion of benefit and equality: excise taxes offered a scarce and necessary

opportunity to stipulate a contribution to the common goods and services from this group as

9 Edwin R.A. Seligman, Essays in Taxation, New York: The Macmillan Company 1921, p. 8. See also p. 18.


at Home and Abroad, New York: The Macmillan Company 1914, p. 4 (“Amid the clashing of divergent

interests and the endeavor of each social class to roll off the burden of taxation on some other class, we

discern the slow and laborious growth of standards of justice in taxation, and the attempt on the part of the

community as a whole to realize this justice.”)

11 See also Edwin R.A. Seligman, Essays in Taxation, New York: The Macmillan Company 1921, pp. 13-14.

12 O.I.M. Ydema, Historische kanttekeningen bij bestedingsbelastingen, MBB 2006/5, p. 190 and Ferdinand

H.M. Grapperhaus, Tax Tales From the Second Millennium, Amsterdam: IBFD 2009, p. 67.

13 J. van der Poel, Sijmen betaal! Belastingen toen en nu, Alphen aan de Rijn: Samsom N.V. Uitgever 1966, p

113. See also Ferdinand H.M. Grapperhaus, De pelgrimstocht naar het draagkrachtbeginsel.

Belastingheffing in West-Europa tussen 800 en 1800, Zutphen: Walburg Pers/Kluwer 1993, p. 66.

14 Adam Smith, The Wealth of Nations, 1776, (Radford, VA: Wilder Publications 2008), pp. 628 and 641.


p. 11

well.15 In this way merchants also contributed their share: the existing taxes made it hard to tax

them because of an impending capital flight. On top of that, through excise taxes visiting

non-residents – particularly in trade cities – also contributed to the general resources. As a

result, residents could be relieved from paying other taxes.16 Furthermore, it was not without

significance that excise taxes bypassed the tax exemptions for the nobility, clergy and other

privileged classes. And rightly so, Seligman states. Because “what was more natural than that

the statesmen and tax reformers should attempt to make them pay something through taxes on

their expenditure, which they could not well escape?”17

The consumption of excise goods was more or less equal for most residents. Thus, excise taxes

roughly brought about equal financial sacrifices (generality of taxation) in the Middle Ages.

Residents – privileged or not – contributed in virtually equal measure to the general resources,

at least in proportion to their expenditures. From a benefit perspective, that definitely seems

fair. After all, a contribution can be asked from anyone who benefits from the common goods

and services. However, (more or less) equal excise tax payments have a disadvantage. A closer

look at the genesis and foundations of these taxes may clarify that.

The first sprouts of excise taxes

The birth of these urban excise taxes roughly took place along the following lines.18 During the

early Middle Ages, monarchs, who were in permanent financial trouble, had gradually granted

15 O.I.M. Ydema, Historische kanttekeningen bij bestedingsbelastingen, MBB 2006/5, p. 190. Following Ely

the sustainability of such reasoning can be contested. Excises, he notes, push up commodity prices and erode

real income. In that way they force “some who are already near the awful line of pauperism to cross it, and

thus puts to death higher aspirations in a class of citizens and lowers the level of civilization.” But that is

not the main objection to excises, because “the absurdity of the thing is seen in this, that when the tax has

destroyed the

Documents

The Tax Tectonics: Well-being and Wealth Inequality in ... · Advisors. Peter’s kindness and love for tax studies have enabled me to combine academia and practice. He opened up