Algemene Heffingskorting: Can the Netherlands General Tax Credit Be a Model for Canada?

When the Poverty Reduction Act received Royal Assent in June of 2019, it served to focus federal government attention on combatting poverty as never before.  The Act established Canada’s first Official Poverty Line, the Market Basket Measure (MBM) that would price on a regional basis a basket of goods and services required to meet basic household needs.  It would also commit the federal government to concrete poverty reduction targets of 20% between 2015 and 2020 and 50% between 2015 and 2030 and it established an independent National Advisory Council on Poverty to monitor progress, advise the government, and report annually to Parliament.

The 2020 target was achieved three years ahead of schedule according to the 2017 Canada Income Survey, which found 825,000 fewer Canadians living in poverty and Canada’s lowest recorded poverty rate of 9.5%.  The announcement credited two refundable tax credit programs, the new Canada Child Benefit and the venerable Guaranteed Income Supplement, for much of the success.  The 2030 target to cut the poverty rate almost twice as much again could be much more challenging, however, as the success in reducing poverty for the elderly and for families with children leaves the other prominent family types, non-elderly couples and singles without children, accounting for more and more of the remaining poor.  It will be very difficult, if not impossible, to achieve the 2030 poverty target without addressing poverty among these ignored groups.  The success of refundable tax credit programs in reducing poverty for families with children and the elderly leads in the direction of a more generalized refundable tax credit to fill the gaps in the anti-poverty strategy, achieving a basic income for all Canadian tax filers in the process.

The Canadian precedents established by the Guaranteed Income Supplement and the Canada Child Benefit, as well as the more modest Goods and Services Tax Credit, are not unique.  Gerrit Zalm, as head of the Dutch Planning Bureau, had declared in 1993 that a refundable tax credit would be the logical next step toward a partial basic income for the Netherlands,  When the Dutch Labour Party formed a second consecutive coalition government after the 1998 elections, Zalm as Finance Minister undertook a major overhaul of the Dutch tax system that included without fanfare the introduction in 2000 of a refundable tax credit that would amount to a small partial basic income in the style of an income-conditioned benefit or negative income tax.  Someone without taxable income would receive the maximum benefit or income guarantee of €2100 annually, or about a third of the assistance benefit for a single person.

The General Tax Credit, or Algemene Heffingskorting, provided income-tested benefits to all taxpayers which raised assistance benefits in the Netherlands by one-third and represented a significant anti-poverty strategy with built-in work incentives, since the tax rate on earnings beyond an initial exemption was only about 5%.  Thus, while social assistance continued to replace earnings with reduced benefits roughly dollar for dollar in its historic fashion, the General Tax Credit allowed social assistance recipients to retain all earnings initially and 95% of earnings beyond the income exemption level.  As the Dutch Labour Party and its coalition partners lost power to the Christian Democratic Appeal, the General Tax Credit was modified but its essence preserved.  Payments were targeted to low-income tax filers by instituting a maximum annual credit of €2265 for taxable incomes up to €20,142 that would be phased out at a tax rate of 4.7% so that benefits ceased at €68,507.  Although a portion of the tax credit can currently be transferred to a spouse, this feature is to be phased out by 2023 for all those born after 1962, such that the credit will be available strictly on an individual basis for the non-elderly, precisely the form an adult partial basic income might take in Canada.

What was the economic impact of this partial basic income, delivered as a refundable tax credit along the lines of a negative income tax plan to support lower-income families?  Concerns that a tax credit of this sort would create work disincentives have not been supported by past experimental and non-experimental evidence, but comparable studies of labour supply response in the Netherlands are lacking.  At an aggregate level, the introduction of the General Tax Credit in 2000 did not find fortuitous economic circumstances, as average GDP growth of 3.3% during the 90s was followed by growth of only 1.7% in the 00s.  Despite this slower growth, however, the rate of employment of adults continued to grow from 60% in 1999 to 64% in 2009 and the unemployment rate continued to fall from 3.1% in 1999 to 2.6% in 2009.  These broad measures suggest no detectable adverse labour response, never mind social decay, from a program that provided significant new assistance to low-income families in a fashion that Canada could emulate in the near future.

Author Wayne Simpson is a Professor of Economics, University of Manitoba and Research Fellow, University of Calgary, School of Public Policy