100% Taxation?

On occasion you find a fascinating article that makes you think or shakes up your personal views. In this case it makes you think about taxes and the associated benefits of living in a relatively social country like the Netherlands. But 100% taxation? Really?

Tax is annoying!

Paying taxes is annoying (especially if you see about 30-50% of your hard earned cash disappear), but there are some benefits including a good logistical infrastructure & embankments to protect you from the ever rising water. And, as also noted in the post of the government screwing your FIRE plans, think of good police/fire fighting/medical systems.

Then there is also some (financial) security if life decides to throw you a curve ball (i.e. it is very hard to become severely impoverished in the Netherlands). So taxes are annoying, but they also create a social safety net and allowed our country to have economical growth too. It’s probably a necessary evil! Albeit how well and how efficiently the government spends tax money is a whole different story….

The 100% Taxation story

The following article is freely translated by yours truly (for the original Dutch version see the link below). We hope you find it interesting too!

What is Prosperity?

My father has a tree nursery. A noble profession, high CO2 compensation levels and the world looks greener.

There is some good money to be made in this business, so he opted to make his business a legal private company. One day my father sold a particular plant, making him (net of expenses) €100.

My father, righteous as he is, paid the government a 20 percent corporate profit tax. Besides being righteous, my father is also is a very kind man; so he decides to buy a gift for my mother. He pays himself the remaining 80 euros into his private account.

The taxman thinks this is an excellent idea and wants 25 per cent (see also tax in Box 2). My father, a wise man as he is avoids his car and walk righteous, but slightly disappointed, with 60 euros to the store.

Now my mother is fond of brandy, so he decides to buy a bottle of it. The tax is also fond of cognac because it gets about 15 euros in VAT and various alcohol related duties.

100% Taxation
100% Taxation

The 45 euro “left over”, my father adds to a donation to his niece. The taxman appreciates the generous gift with a donation tax of 30 percent, or 13.50 euros. The niece, much like her uncle, is thankful and deposits the gift including the remaining 31.50 euros into the bank; where she gets an interest rate of 1.2 percent per year.

The taxman believes that 1.2 percent return on investment is not enough and pretends she gets 4 percent (see here) and after a few years, this 31.50 dwindled to 20 euros. By the time her son inherits this 20 euros, only 18 euros is left over due to 10 percent inheritance tax. By this time her son will be able to just afford to pay the duties on a pack cigarettes, and we can therefore conclude that the entire 100 euros has come into the hands of the state.

The fact that a single euro can be taxed several times in this way, sounds serious. But in reality the situation is even grimmer. We have not even talked about gaming tax, social security, income tax, dividend tax and more.

To show how grim the situation is, we make the following calculation. If you take the Gross National Product (often incorrectly used as an indicator of prosperity) of the Netherlands, and divide this by the total revenue (taxes) of the government, you come to a factor of about 2.4. That means that every euro earned in Netherlands will end up within the state treasury in about two and a half years.

This actually applies to most European countries – except Norway and Sweden, of course, where this is done within a period of only two years. Poland is an exception. In Poland the income flows to government coffers within only 6 to 7 years. Just as in the United States and Canada.

The social welfare in these countries is hard to find, which proves that the ratio of GDP / Income is a more accurate welfare indicator than GDP alone. So if we still have some complain about the tax rate, please know that we really have nothing to complain.

Source: https://www.accountant.nl/opinie/2014/6/wat-is-welvaart/

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8 Comments

  1. My problem is tax money is not being used effectively. My town has one of the highest property and sales taxes (they are looking for more property tax increases allegedly to fund schools). However, 52% of all the collected taxes goes towards existing pension obligations. Previously when pensions where promised an astronomical ROI was assumed and enough capital was not set aside. So, now we pay high taxes … our schools, infrastructure suck.

    I don’t trust our government to do the right thing with our tax money. Adding more taxes is asking for additional mismanagement.

    Fine with paying taxes as long as they are being effectively used.

    1. I so agree with your last sentence! If governments would be companies, they would be bankrupt a long time ago. We obviously do need taxes for roads, hospitals, police and more, so paying taxes is not such a bad thing. But I don’t like seeing my hard earned taxes go to waste either!

  2. I have no problem paying taxes as long as the government is using the money effectively and efficiently. Unfortunately this typically isn’t the case.

  3. Taxes are no fun, but I see them as a necessary evil. They make sure we have roads, social security, pension.

    What frustrates me is the way the government is putting accents that are not in line with my values. One of them is living within your means… Belgium has 105% debt compared to the GDP… Rather than paying it down, there are some measures and plans they have that might not be the best use of the money compared to lowering the debt snowball.

    1. Hey ATL, yes, you are absolutely right. Same problem in the Netherlands. However, our major eye opener with taxes is the way they impact our financial independence plans. Where Americans can have $150,000 in income, they can end up paying $0 in taxes due to various strategies with their pension (401K, etc.) accounts. Here we have to aim for roughtly 30% more income/wealth to end up with the same. For example, when incorporating taxes into the financial independence calculations, the 4% rule becomes a 3% rule or lower! Ouch….

    1. Frustrating, sure, but it is not all bad! We all do reap the benefits in various forms at various times in our lives.
      We do, however, realize that living in a high taxation country like the Netherlands, it does affect your ability to grow (and live off) your assets.
      Thanks for dropping by R2R!

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