Fiscal decentralisation in the Netherlands: Distributional and employment effects

Fiscal decentralisation is widely advocated as a means to enhance allocative efficiency and accountability at the local level. Moreover, several countries seek to shift taxes from earned income to more “growth-friendly” bases such as immovable property, which is usually levied at the local level. Yet large distributional effects may well impede such tax reforms. In this chapter, we use simulations to explore the distributional effects of a shift from the national earned income tax to either a local tax on the use of residential real estate or a local head tax in the Netherlands. The analysis shows that distributional effects may be reduced considerably by design. Policy scenarios in which distributional effects are minimised, and the tax burden is shifted towards immovable property show that the tax shift yields a moderately positive impact on employment.