Figures and data in Tax and Benefit Policies to Reduce Poverty in the Netherlands: A Microsimulation Analysis

Abstract

With around a million people – or 6% of the population – living below the threshold, poverty remains a tenacious problem in the Netherlands. It is especially prevalent among children, migrants and the very elderly. Planned policies, if implemented, will cause poverty to rise by 28% over the next decades, everything else equal. We use two microsimulation models to estimate the effects of various tax-benefit policies and four larger reforms on poverty. To estimate the costs of implementing these policies and reforms, we also document their effects on employment, income inequality and the government budget. The results indicate that reducing poverty is possible but involves considerable costs in terms of public money and/or jobs. Introducing a budget-neutral universal basic income at the level of the state pension reduces poverty by 60% but requires very high income tax rates and reduces employment by 8%. Other policy options are cheaper but generate smaller reductions in poverty. These findings demonstrate the social trilemma faced by policymakers in modern welfare states: to simultaneously provide adequate minimum income support, maintain sufficient financial incentives for people to find a job, ánd keep the government budget in check. This has become increasingly difficult due to slow wage growth at the bottom of the earnings distribution. However, we also find important differences in cost efficiency. Of the policies with a budgetary impact of 1 billion euros, increasing minimum income support achieves the largest reduction in poverty. Raising the means-tested child budget is a relatively efficient way of reducing child poverty.

This article contains 1 figure and 14 tables.

Figures

**Figure 1.** Net effective marginal income tax rates in the Netherlands in 2022.. Note: Figure 1 shows the average net effective marginal income tax rates (solid line) and the corresponding 5^th and 95^th percentiles (dotted lines), all expressed as percentages, for gross individual incomes between € 0 and € 150,000.Sources: CPB calculations based on the MIMOSI microsimulation model.

Tables

Table 1. Stylized overview of the Dutch system of taxes and benefits

Gross wages	+
Gross profits	+
Gross benefits	+
Gross pensions	+
(Assumed) gross income derived from wealth*	+
(Assumed) income derived from home ownership^†	+
Gross income
Taxes	-
Income tax credits	+
Fiscal effect of tax deductions	+
Net income
Allowances	+
Various individual allowances and compensation schemes	+
Disposable income

Income derived from financial wealth is not taxed directly. Instead, the tax authority makes assumptions about the amount of income derived from the total amount of net household wealth.

Home ownership is taxed indirectly by assuming that one derives income from owning a home (‘eigenwoningforfait’).

Table 2. The basic needs and modest-but-adequate budgets for a single person in 2017 (monthly amounts in euro)

Minimum necessities		Additional expenses for social participation and recreation
Rent^*	443	Additional contributions and subscriptions	18.5
Gas	60	Receive visitors	19.5
Electricity	20	To visit family and friends	5.5
Water	9	Holiday/going out	39
Telephone, television and internet	54	Additional transportation	13.5
Insurance^†	45
Contributions and subscriptions	2
Transportation	14
Clothing and shoes	56
Inventory	74
Maintenance home and garden	24
Food	201
Laundry and cleaning supplies	6
Personal care	21
Miscellaneous	10
Total minimum necessities	1039	Total social participation and recreation	96

Source: Vrooman et al. (2020).

This amount is obtained by estimating the average rent of a reference home.

Mandatory health insurance is excluded because its costs are deducted from income.

Table 3. Planned policies of previous and current governments

1: The lower threshold of the higher bracket of the Box 1 income tax will be raised from 2025 onwards.
2: The minimum income benefit is gradually reduced because the double tax credit that is applied to the reference minimum wage – this is the net amount a couple would end up with in the hypothetical case that one of them would receive a gross benefit equal to the statutory gross minimum wage, while the other would have no income - on which the minimum income benefit is based is gradually phased out.
3: The transferability of the general tax credit, the in-work tax credit, and the in-work tax credit for single parents and second earners in couples with children will be abolished.
4: The imputed income from homeownership will be reduced by 0.05%.
5: The deduction for zero (or very low) home acquisition debt (‘wet Hillen’) will be abolished.
6: The reduction percentage of the health care allowance will be further increased.
7: The lower threshold of the second bracket of the Box 1 income tax for pensioners will be indexed to a limited extent (75%) for people born after 1945.
8: The pension agreement of 2020 will lead to a 0.3% reduction in pensions by 2060 (after 2060 it will further lower pensions but this period is excluded from our analysis).
9: The tax credit for the self-employed will not be indexed.
10: The maximum rate for tax deductions will be further reduced to the lower tariff in the two-bracket system of income tax over the period until 2023.
11: The mortgage redemption requirement to be eligible for mortgage interest deduction will be gradually increased over the period until 2042.

Table 4. Simulated effects of various individual policy options^§

Policy options	Ex-ante budgetary effect € bn	Poverty in persons %	Poverty in euros %	Poverty in persons (within group) %	Poverty in euros (within group) %	Employment %	Income inequality %
I. Policies aimed at children
1: Raise child budget from third child onwards 2: Raise child budget for single parents 3: Raise child budget, combination of 1 and 2 4: Make in−work tax credit for second earners/single parents refundable	−0.2 −0.1 −0.3 −0.1	−2.5 −0.9 −3.5 −0.1	−1.1 −0.4 −1.5 −0.1	−7.2 −2.3 −9.9 −0.3	−3.4 −1.3 −4.6 −0.2	0.0 0.0 0.0 0.0	−0.1 −0.1 −0.1 0.0
II. Policies aimed at the working age population
5: Make in−work tax credit refundable 6: Raise in−work tax credit for low incomes 7: In−work tax credit, combination of 5 and 6 8: Raise minimum income benefit to state pension level 9: Reverse reduction in minimum income benefit after 2021 10: Raise minimum income benefit to 70% of reference minimum wage per hh member	−0.3 −1.2 −2.5 −1.4 (−2.9) −0.9 (−1.9) −1.8 (−3.7*)	−0.8 −3.1 −6.3 −20.0 −16.7 −10.7	−0.8 −1.7 −4.7 −8.8 −7.3 −4.3	−1.1^† −8.8^† −14.0^† −57.0^† −48.0^† −27.3^†	−1.1^† −4.5^† −9.3^† −57.1^† −48.3^† −21.3^†	0.0 −0.1^‡ −0.2^‡ −0.9^‡ −0.6^‡ −1.2^‡	−0.1 −0.4 −0.7 −0.9 −0.6 −0.5
III. Policies aimed at the elderly
11: Make tax credit for retirees refundable 12: Raise healthcare allowance for the elderly only by € 0.3 bn 13: Raise the tax deductibility of healthcare costs for the elderly only by € 0.3 bn	−0.8 −0.3 −0.3	−1.7 −0.4 −0.2	−2.2 −0.5 −0.1	−10.0 −2.8 −1.6	−14.6 −4.0 −1.1	. . .	−0.4 −0.2 −0.1
IV. General policies
14: Make general tax credit refundable 15: Make general tax credit refundable and raise it by € 0.5 bn 16: Raise the tax deductibility of healthcare costs by € 0.3 bn	−4.8 −5.5 −0.3	−16.0 −17.5 −0.9	−19.1 −20.1 −0.5	. . .	. . .	−0.8^‡ −0.8^‡ .	−1.1 −1.3 −0.1

Note: The reported effects document the changes relative to the structural baseline scenario (counterfactual), which assumes that all policies currently being gradually phased in are fully implemented but no additional policy changes occur.

The amounts between brackets show the total ex-ante effect when taking into account behavioural responses.

For the policies 5 to 10, the relevant group corresponds to a subcategory of the working age population, in particular workers (policies 5 to 7) or recipients of minimum income benefit (policies 8 to 10).

Negative employment effects have an (unquantified) upward effect on poverty.

Table A1 in the appendix presents the results for the AROP threshold.

Table 5. Simulated effects of selected individual policy options with an imposed budgetary impact of € 1.0 bn^§

Policy options	Ex-ante budgetary effect € bn	Poverty in persons %	Poverty in euros %	Poverty in persons (within group) %	Poverty in euros (within group) %	Employment %	Income inequality %
I. Policies aimed at children
1: Raise child budget from third child onwards and further increase it for each child 2: Raise child allowance	−1.0 −1.0	−7.3 −4.2	−3.3 −2.1	−19.8 −10.9	−10.2 −6.4	−0.2^‡ −0.1^‡	−0.4 −0.2
II. Policies aimed at the working age population
3: Raise in−work tax credit 4: Raise minimum income benefit	−1.0 −1.0 (−2.0*)	−0.6 −17.9	−0.2 −7.9	−1.9^† −55.7^†	−0.7^† −55.9^†	0.1 −0.7^‡	0.0 −0.7
III. Policies aimed at the elderly
5: Make tax credit for retirees refundable and raise it 6: Raise healthcare allowance for the elderly only	−1.0 −1.0	−1.8 −1.9	−2.4 −2.0	−10.9 −15.3	−16.0 −14.5	. .	−0.5 −0.9
IV. General policies
7: Raise rent allowance 8: Raise healthcare allowance 9: Raise general tax credit	−1.0 −1.0 −1.0	−11.2 −5.6 −2.0	−7.8 −4.7 −1.3	. . .	. . .	−0.1^‡ −0.1^‡ 0.0	−1.1 −0.7 −0.3

The amount between brackets shows the total ex-ante effect when taking into account behavioural responses.

For the policies 3 and 4, the relevant group corresponds to a subcategory of the working age population, in particular workers (policy 3) or recipients of minimum income benefit (policy 4).

Negative employment effects have an (unquantified) upward effect on poverty.

Table A2 in the appendix presents the result for the AROP threshold.

Table 6. Basic income scenarios

	Baseline	Scenario 1	Scenario 2
UBI	Euros per month
Per adult	0	560	635
Per household	0	500	600
Total single adult household	0	1060	1235
Total per adult in a couple	0	810	935
UBI	Euros per year
Total single adult household	0	12,722	14,822
Total per adult in a couple	0	9,722	11,222
Benefits
Minimum income scheme (‘bijstand’)	maintained	abolished	abolished
Disability benefits for young people (‘Wajong’)	maintained	abolished	abolished
Public pension (‘AOW’) and benefits for widows/widowers (‘Anw’)	maintained	netted with UBI	abolished
Unemployment and disability benefits (‘WW’, ‘ZW’ and ‘WIA’)	maintained	netted with UBI	netted with UBI
Taxes, tax deductions and tax credits
Tariff first bracket Box 1	37.1%	52.7%	56.5%
Tariff second bracket Box 1	49.5%	70.4%	75.4%
Income tax credits	maintained	abolished	abolished
Tax on imputed income from homeownership (‘eigenwoningforfait’)	maintained	abolished	abolished
Mortgage interest rate tax deduction (‘hypotheekrenteaftrek’)	maintained	abolished	abolished
Allowances
Rent allowance (‘huurtoeslag’)	maintained	maintained	maintained
Child allowance (‘kinderbijslag’)	maintained	maintained	increased to 300 euros per child per month
Child budget (‘kindgebonden budget’)	maintained	maintained	abolished
Child care allowance (‘kinderopvangtoeslag’)	maintained	maintained	abolished
Healthcare allowance (‘zorgtoeslag’)	maintained	maintained	abolished
Study subsidies (‘studiefinanciering’)	maintained	abolished	abolished

Note: Due to rounding, the annual UBI amounts do not exactly correspond to 12 times the monthly amount.

Table 7. Simulated effects of larger reforms^†

	Poverty in persons	Poverty in euros	Employment	Income inequality
	%	%	%	%
Universal Basic Income
Scenario 1	−45.3	−62.4	−6.4*	−10.0
Scenario 2	−60.5	−62.3	−8.3*	−11.7
Negative income tax	−14.8	−19.3	−0.9*	−2.1
Unified allowance	11.0	13.1	0.6	−0.7

Negative employment effects have an (unquantified) upward effect on poverty.

Table A3 in the appendix presents the result for the AROP threshold.

Table 8. Boxplots of the percentage change in household disposable income for different household groups in UBI scenario 1

	Distribution of effect on disposable income
	5%	25%	50% (median effect)	75%	95%
	% change
All households	−18.4	−8.3	−1.5	7.2	31.4
Income percentiles
1-20%	−19.2	−12.5	7	18.5	51.7
21-40%	−8.9	−3.4	3.1	9	33.6
40-60%	−12.2	−4.1	0	4.3	25
61-80%	−15.5	−8.5	−4.4	1.7	19.9
81-100%	−22.4	−12.9	−8.1	−1	12.5
Income source
Employment	−16.4	−7.6	−0.4	8.8	31.4
Benefits	−29.9	−5.9	6.4	10.5	36
Pension	−19.1	−10.9	−4.7	0.7	25.3
Household type
Dual earners	−18.1	−9.5	−5	1.5	22.4
Single earners	−18.8	−6.1	1.6	8.5	31.8
Single-earner couples	−5.2	11	20.2	32.6	61.1
With/without children
With children	−19.2	−11.3	−4.9	6.7	30
Without children	−15.8	−5.6	1.5	10	33.5

Table 9. Boxplots of the percentage change in household disposable income for different household groups in UBI scenario 2

	Distribution of effect on disposable income
	5%	25%	50% (median effect)	75%	95%
	% change
All households	−19.6	−9.3	−1.9	9.7	33.4
Income percentiles
1−20%	−14.8	−10.6	8.6	19.6	54.3
21−40%	−14.2	−6.9	1.9	10.7	35
40−60%	−14.5	−5.8	0.4	6	29.4
61−80%	−18.6	−8.5	−3.8	4.4	23.9
81−100%	−27.5	−14.5	−8.5	0	14.8
Income source
Employment	−20.5	−7.2	1	11	34.6
Benefits	−30.2	−4.7	10.7	15	41.6
Pension	−16.1	−11.6	−8.1	−3.3	21.2
Household type
Dual earners	−22	−10.2	−5	3.7	25.4
Single earners	−16.5	−8.6	0.5	11	33.7
Single−earner couples	−5.9	13.6	23.8	33.4	64.3
With/without children
With children	−27.6	−11.3	−2.1	10.1	35.4
Without children	−17.1	−5.8	3	12.4	35.9

Table 10. Boxplots of the percentage change in household disposable income for different household groups in the negative income tax scenario

	Distribution of effect on disposable income
	5%	25%	50% (median effect)	75%	95%
	% change
All households	−2.1	−1.7	−1.5	0.4	7.5
Income percentiles
1−20%	−1.6	−1.5	−1.2	0.7	12.8
21−40%	−1.8	−1.6	−1.4	1.5	8.9
40−60%	−2	−1.7	−1.5	0.5	6.9
61−80%	−2.1	−1.8	−1.6	−0.1	5
81−100%	−2.6	−2	−1.8	−0.5	2.9
Income source
Employment	−2.2	−1.8	−1.5	−0.4	7.1
Benefits	−2.1	−1.6	−1.5	−1	11
Pension	−1.9	−1.5	−1.2	1.1	7.3
Household type
Dual earners	−2.2	−1.8	−1.4	1.1	6.5
Single earners	−2.1	−1.8	−1.5	−1.2	3.7
Single-earner couples	1	3.8	6.4	9.6	17.1
With/without children
With children	−2.2	−1.6	−0.9	2.9	9.8
Without children	−2.2	−1.8	−1.6	−1.3	5.8

Table 11. Boxplots of the percentage change in household disposable income for different household groups in the unified allowance scenario

	Distribution of effect on disposable income
	5%	25%	50% (median effect)	75%	95%
	% change
All households	−5.5	−0.4	−0.1	−0.1	9.2
Income percentiles
1−20%	−14.3	−4.1	−0.3	4	13.4
21−40%	−3.6	−1	−0.1	6.9	10.9
40−60%	−4	−0.1	−0.1	−0.1	4.8
61−80%	−2.4	−0.2	−0.1	−0.1	−0.1
81−100%	−0.5	−0.2	−0.1	−0.1	−0.1
Income source
Employment	−3.9	−0.2	−0.1	−0.1	8.3
Benefits	−15.9	−5.2	−0.3	1.4	9.9
Pension	−5.1	−0.4	−0.1	2.8	10.1
Household type
Dual earners	−3.3	−0.2	−0.1	−0.1	3.3
Single earners	−8.3	−0.5	−0.1	4.3	11.3
Single−earner couples	−5.8	−1.5	−0.1	−0.1	5.9
With/without children
With children	−6.8	−2.2	−0.2	−0.1	1.6
Without children	−4.3	−0.2	−0.1	−0.1	9.7

Table A1. Simulated effects of various individual policy options, poverty threshold equals 60% of median net disposable income

Policy options	Poverty in persons %	Poverty in euros %	Poverty in persons (within group) %	Poverty in euros (within group) %
I. Policies aimed at children
1: Raise child budget from third child onwards	−1.3	−1.0	−3.7	−3.2
2: Raise child budget for single parents	−0.5	−0.5	−1.2	−1.7
3: Raise child budget, combination of 1 and 2	−1.9	−1.6	−5.1	−4.9
4: Make in−work tax credit for second earners/single parents refundable	−0.1	−0.1	−0.4	−0.2
II. Policies aimed at the working age population
5: Make in−work tax credit refundable	−0.6	−0.7	−0.8*	−0.9*
6: Raise in−work tax credit for low incomes	−3.0	−2.4	−7.7*	−7.0*
7: In−work tax credit, combination of 5 and 6	−5.4	−5.1	−11.8*	−11.4*
8: Raise minimum income benefit to state pension level	−4.6	−11.0	−9.9*	−44.2*
9: Reverse reduction in minimum income benefit after 2021	−2.3	−7.7	−5.2*	−30.6*
10: Raise minimum income benefit to 70% of reference minimum wage per hh member	−7.9	−5.2	−24.0*	−18.8*
III. Policies aimed at the elderly
11: Make tax credit for retirees refundable	−2.0	−2.1	−12.4	−12.8
12: Raise healthcare allowance for the elderly only by € 0.3 bn	−1.0	−0.6	−6.6	−4.5
13: Raise the tax deductibility of healthcare costs for the elderly only by € 0.3 bn	−0.4	−0.2	−2.8	−1.6
IV. General policies
14: Make general tax credit refundable	−13.7	−16.3	.	.
15: Make general tax credit refundable and raise it by € 0.5 bn	−14.5	−17.3	.	.
16: Raise the tax deductibility of healthcare costs by € 0.3 bn	−0.5	−0.5	.	.

Table A2. Simulated effects of selected individual policy options with an imposed budgetary impact of € 1.0 bn, poverty threshold equals 60% of median net disposable income

Policy options	Poverty in persons %	Poverty in euros %	Poverty in persons (within group) %	Poverty in euros (within group) %
I. Policies aimed at children
1: Raise child budget from third child onwards and further increase it for each child	−4.1	−3.5	−9.8	−11.1
2: Raise child allowance	−1.3	−1.1	−2.9	−3.5
II. Policies aimed at the working age population
3: Raise in−work tax credit	−0.4	−0.3	−1.3*	−1.0*
4: Raise minimum income benefit	−6.9	−4.4	−13.8*	−10.1*
III. Policies aimed at the elderly
5: Make tax credit for retirees refundable and raise it	−2.4	−2.3	−14.4	−14.2
6: Raise healthcare allowance for the elderly only	−2.8	−2.3	−18.3	−16.0
IV. General policies
7: Raise rent allowance	−5.3	−7.9	.	.
8: Raise healthcare allowance	−3.5	−4.4	.	.
9: Raise general tax credit	−1.4	−1.4	.	.

For the policies 3 and 4, the relevant group corresponds to a subcategory of the working age population, in particular workers (policy 3) or recipients of minimum income benefit (policy 4).

Table A3. Simulated effects of larger reforms, poverty threshold equals 60% of median net disposable income

	Poverty in persons	Poverty in euros
	%	%
Universal Basic Income
Scenario 1	−28.3	−48.4
Scenario 2	−26.1	−52.9
Negative income tax	−14.1	−16.1
Unified allowance	5.1	10.4