Dutch Dividend Tax Abolition Plan in Budget Draws Opposition Ire

(Bloomberg) -- Of all the giveaways expected in Dutch Prime Minister Mark Rutte’s 2019 budget, nothing rankles many of his compatriots more than a plan to abolish the dividend tax.

Rutte, Finance Minister Wopke Hoekstra and other government ministers will unveil the budget in The Hague on Tuesday after a speech by King Willem-Alexander on the state of the nation and cabinet plans for the coming year.

While the proceedings will keep to tradition with the king and other members of the royal family dressed in finery riding chariots, market pros will be looking beyond the pomp and show to see what the budget has to say about the dividend tax, which has become the most controversial item in the first year of Rutte’s third government.

With a booming economy -- the Dutch Bureau for Economic Policy Analysis CPB estimates GDP will increase 2.5 percent in 2019 -- Rutte has said recently that “people will feel in their wallets that the Netherlands is doing better. We will lower taxes and invest in health care, education, infrastructure.” Yet worries are emerging in some quarters that the government’s capacity to do that may be constrained by a hole in the budget from the possible elimination of the dividend tax.

Dutch Dividend Tax Abolition Plan in Budget Draws Opposition Ire

Opposition parties claim Rutte is helping international companies more than the country’s people. While scrapping the dividend withholding tax is meant to keep the Netherlands attractive, killing it means hundreds of millions can’t be spent on locals, they say.

“Abolishing dividend tax means replenishing foreign treasuries with money that could be better spent in the Netherlands, in good healthcare, affordable housing, more teachers and safe streets,” three left-wing opposition parties said in a motion in the lower house of parliament this summer.

Rutte’s government last year estimated abolishing the tax will cost 1.4 billion euros ($1.6 billion) a year. On Sept. 15, NRC Handelsblad, citing a copy of the budget it has seen, put it at 1.9 billion euros as the growing economy pushes up corporate earnings, further fueling the opposition’s outrage about scrapping the tax. Support for abolishing the dividend tax fell to 15 percent, a survey last month by pollster Maurice de Hond showed, from 24 percent in November.

The 51-year-old premier has himself expressed some misgivings, recently labeling the proposal “bizarre” and “very annoying.” He maintains, however, that the measure is absolutely necessary for the Dutch economy.

The Dutch dividend tax legislation was introduced in 1966 with a levy of 25 percent. In 2007, the rate was lowered to 15 percent. Most large European Union countries have a dividend tax with the exception of Hungary and the U.K.

Compensatory Measures

Rutte and Finance Minister Hoekstra are struggling to find ways to compensate for the lost state revenue. NRC Handelsblad reported that the government will cut the corporate tax rate from 25 percent to 22.25 percent instead of an earlier agreed 21 percent.

Rutte’s cabinet needs to take some fiscal measures to fulfill promises of raising spending power for everyone, said Barbara Baarsma, Rabobank’s director for knowledge development.

“If the cabinet decreases tax on labor, higher wages will be less expensive for companies and employees will profit more,” she said.

While the March 2017 elections left the Dutch political landscape splintered, Rutte took power at a time when the country’s economy motored along nicely. In the second quarter, gross domestic product grew 0.7 percent compared with the three previous months.

Under Pressure

A mounting sentiment that companies are the biggest winners of the economic improvements and that salary increases are needed to redistribute the gains is a misplaced notion, ING Chief Economist Marieke Blom said in an interview at the bank’s headquarters.

“Companies’ domestic profitability is still under pressure, they are operating in a competitive environment, many still need to restore their balance sheet, to raise investments, while being exposed to digitalization,” she said.

In his first budget since forming his third cabinet in October, Rutte will also need to deal with the impact of the decision to end output from Europe’s largest natural gas field. The cost to the state from lower output will be 300 million euros next year, increasing to 1.5 billion euros in 2023, RTL reported on September 14, citing from the 2019 budget. In the same report, RTL said that Dutch GDP is expected to grow 2.6 percent next year.

Rutte’s coalition government has the smallest possible majority in both houses of parliament, and his government faces a crucial provincial election next year, with the outcome of that vote determining whether the former Unilever Human Resources executive can hold on to a one-seat majority in the Senate.

Based on an October 2017 coalition agreement reached between the four governing parties, other proposed budget measures are expected to include:

  • Increased defense spending at an estimated cost of 1.5 billion euros
  • Investments in education, research and innovation, with a cost of up to 2 billion euros
  • Ending tax deductions for CoCo bonds; estimated proceeds of 150 million euros
  • Shrinking expat tax benefits at estimated proceeds of at least 284 million euros

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