As stated above, taxation on labour will see a cut of €5 billion. By doing this the ‘wedge’ average will fall by almost 2 percentage points. The Wedge is defined as the difference between labour costs to employers and the net pay to employees. The goal of this is to shift the tax burden towards low to middle income earners. The government expects the impact to be motivation for people on benefits to return to work. The incentive, therefore, to work (more) is increased particularly for those with the lowest incomes. For every extra euro earned, they will pay less in tax and premiums. This year it is around 28 percent, and next year it is expected to fall to 23 percent.
In order to supplement this, the government will also be implementing incentives for employers to give work to those within the lower end of the labour market. This will be done from 2017 onwards, where for each employee who earns a salary around the minimum wage; the employer will gain €2,000 per year for each employee relevant to the scheme.
According to the Rijksoverheid, various cost schemes will allow employers to provide some benefits tax free, such as travel allowances and study costs. Employers will be able to provide tax-free schemes so long as their total value is less than 1.5% of the salary costs. If exceeding this, employers will have to pay 80% of the tax on the excess.
The general tax credit will also be phased out, and the tax rate will be reduced in the second and third tax bands by approximately 2 percentage points. The third band, however, will come in effect at a higher income level. The highest tax band, with a tax of 52% will have its border moved up by nearly €9000 to €66,422. The consequence of this is that those income earners below this tax band will be keeping more of their gross salary.
The reasoning behind phasing out the general tax credit is in part due to the goal of simplifying the various tax regimes. In line with this, two fiscal regulations to stimulate innovation within companies, the R&D allowance (R&D aftrek) and the taxation reduction for Research and Development (WBSO) merged into one tax scheme. These difficult to implement premium reductions will be replaced by a system of wage based tax credit for older employees, and those with occupational disabilities. As well as this, the financial ministry also intend to set aside €100 million to provide further incentive for employment to those with an occupational disability. A total of 30,000 'sheltered' workplaces will also be added. The money for these schemes will be given to the municipalities and is intended to run for the next five years.
Employers will pay less towards the wages of those who earn 120 percent of the minimum wage. This will cost €500 million. The increase in employment as well as the introduction of the so-called Lage-inkomensvoordeel (Low Income Benefit) will soften the effects of the necessary reform of the minimum wage, according to the cabinet. The Low Income Benefit is set to begin in 2017. This autumn the cabinet intends to send a preliminary note on the minimum wage to the Second Chamber.
The Centraal Planbureau (Bureau for Economic Policy Analysis) estimate that undertaking these tax and benefit schemes will create 21,000 jobs within two years of their execution. However, in the long term, they will generate a further 35,000 jobs.
There have also been several changes for how employees with children will be taxed and discounted. For example, there is the combination discount, where married couples with children will gain an increased tax credit. As well as this, there is the increased childcare allowance, where from the second child onwards, employees will be getting a higher allowance. All in all, these two benefit schemes will be combined into one.
While there have been no changes to the current laws of maternity leave, they have made a proposed change to paternal laws, where paternity leave will be increased from two days to five as of 2017. As well as this, there will be a new service provided where young children will be allowed the benefit of two day-sessions at a pre-school, at an expected cost to the treasury of €60 million. This is done so as to alleviate employees with young children from needing to juggle both employment and finding childcare throughout the year.
By: Alex Morrison