Abolishing dividend tax: nice for Shell, unnecessary for the Netherlands

The new cabinet is planning to abolish dividend tax. Although this will cost our Treasury € 1.4 billion, it will also attract companies to the Netherlands. In other words, the extra business and employment generated by this move should cancel out the loss in tax revenue. During last week’s government policy statement, Prime Minister Mark Rutte claimed that abolishing dividend tax was crucial to establishing the Netherlands’ international competitive position. The cabinet had wheeled out the heavy artillery to defend this new measure.

Prof. Harry Garretsen

Unfortunately, there is no proof that abolishing this tax would actually help the economy as a whole. When asked, even the official auditors at the CPB Netherlands Bureau for Economic Policy Analysis do not expect this move to have a positive effect on employment, for example. Questioned about the reasons for this measure, the government kept its lips sealed. Yesterday, it suddenly emerged that several of our larger multinationals (led by Shell) had insisted on it during the formation of the government. International investors in Shell or Unilever pay 0% tax on dividends on shares traded in the United Kingdom, because unlike the Netherlands, the UK does not levy dividend tax. Shell believes that by bringing the dividend tax in the Netherlands into line with that in the UK (i.e. 0%), the company will find it easier to acquire funding for its investments. The main fault in this line of reasoning is that equity funding (through shares) constitutes a relatively minor source of finance for company investment. Having one’s own resources is much more important; in this respect Shell is no different from your average SME. Research shows that lowering dividend tax has little or no effect on a company’s investments. However, if you look at the private business interests of Shell or Unilever (companies with major interests in the UK), it is not hard to see why they are keen to abolish dividend tax.

The sticking point for Rutte is that the coalition agreement obviously doesn’t state that we are prepared to sacrifice € 1.4 billion of tax revenue to keep Shell or Unilever happy. The reason consistently given by the cabinet is that the abolition of this tax would be good for, in fact essential to, the national economy. In other words, to all of us. Clinging to dividend tax would supposedly make the Netherlands an unattractive base for international companies. There is no substantiation for this doom scenario. In fact, the cabinet is falsely creating the impression that companies are led by aspects such as dividend tax and corporation tax when choosing a base for their operations. Time and time again, we have seen that companies choose the Netherlands as a base because of our excellent infrastructure, highly qualified workforce and more generally, exceptionally good working and living conditions. All these facets are largely financed from tax revenues, which companies (and citizens) are willing to pay as long as the tax rates are not too high and in line with other countries. EU countries with a strong economy, such as the Netherlands and Germany, can afford to charge relatively high taxes because they offer plenty of benefits that are paid for by these tax revenues.

So establishing a good-quality base for industry comes at a price. Countries that have less to offer in this respect will sooner feel the need to compete with their tax rates in the hope of attracting more business. The Dutch economy won’t succeed in the international arena if we adopt a low-cost strategy, such as abolishing dividend tax.
Viewed from this angle, it would be better to spend the € 1.4 billion on improving and boosting education, because this is the key to the long-term economic success of our country. In short, although this may be nice for Shell, it won’t necessarily be good for the Netherlands.

Harry Garretsen is Professor of International Economics & Business at the University of Groningen .