The Folly of Dutch Tax Reforms

I typically steer clear of politics, but as someone who has come to deeply love the Netherlands and its people, when I see a nation I cherish so much heading down a troubling path, silence sounds like a betrayal. 

That is why I have to speak out against the proposed/ongoing reforms to the Box 3 tax system, specifically the actual returns in Box 3, which introduce a 36% tax on actual returns, including unrealized capital gains. This reform is not just misguided, it is arguably more flawed than the previous system of taxing fictitious returns, which the Dutch Supreme Court rightly struck down for violating human rights and EU law. 

This bill, approved by the Dutch House of Representatives (Tweede Kamer) and now awaiting Senate review, risks accelerating the very decline it claims to prevent. Here are my predictions based on the bill's implications:

Disproportionate burden on the middle-income earners: Unsophisticated middle-income earners, including everyday savers and pension holders, will bear the brunt. They lack the resources to restructure assets into exempted categories like real estate or startup shares, or to relocate abroad. Meanwhile, the wealthy and sophisticated can easily evade it through tax planning, offshore structures, or emigration.

Potential liquidity issues and ensuing volatility in financial markets: By taxing unrealized gains, the system can create liquidity problems by forcing premature asset sales to cover tax bills without actual cash inflows. This is especially acute for volatile holdings where a temporary surge could trigger massive taxes, only for the prices to plummet later. 

Rise in short-termism and market volatility: The annual taxation of paper gains punishes long-term holding, incentivizing frequent trading to realize losses or defer taxes. This could make Dutch markets more volatile, as investors prioritize quick flips over stable, productive investments, ultimately harming economic stability. This will come at the cost of long-term investment. I reckon some future retirees will face serious financial stress in their retirement, compounding the challenges of an aging population and already modest retirement expectations.

No/little net increase in state revenue: Despite the intent, the government is unlikely to collect more taxes overall. Easy avoidance by the affluent, combined with a shrinking tax base from economic slowdown and investor exodus, will dwindle taxable income.

Long-term impoverishment of the nation: Over time, the above dynamics discourage investment, stifle growth, and make the country less attractive, leading to a poorer economy.

What is really worrisome to me is that if lawmakers can enact such a shortsighted policy, what other ill-conceived measures might follow? Having emigrated from Iran, a country plagued by economic mismanagement and decline, I can recognize the warning signs from afar. This piece of legislation is a step toward the kind of decline I have already witnessed in my home country, and the Netherlands deserves better.