CPB: taxes are not a good way to adjust behaviour

The government should be cautious about influencing behaviour through the tax system. Otherwise, the system will become unnecessarily complex and thus more difficult to implement and more difficult to oversee for citizens and businesses. The Netherlands Bureau for Economic Policy Analysis (CPB) warns against this. In a recent publication, CPB provides guidance on how to determine in advance whether the use of a tax measure makes economic sense.

By imposing excise duties or specific taxes, certain behaviour can be discouraged, while deductions, tax credits and exemptions can actually stimulate behaviour. However, these tax schemes significantly reduce tax revenues, requiring general rates or other taxes to be increased to generate sufficient revenue.

Assessment framework

To address these challenges, CPB presents a trade-off framework that addresses the effectiveness and efficiency of new and existing tax instruments. The trade-off framework provides guidance for assessing whether a tax instrument is suitable to achieve a particular goal, and can prevent the use of tax instruments from overshooting the mark. The framework consists of six steps, focusing on effectiveness and efficiency.

The balancing framework is applied to four diverse tax instruments: a sugar tax, the carbon tax for industry, the innovation box in corporate income tax and the means-tested labour tax credit in income tax. It shows that there are many snags in deploying tax instruments for the purpose of influencing behaviour and that there are big differences in effectiveness and efficiency.

Restraint

CPB concludes that restraint is needed when deploying tax instruments. Even when it is economically legitimate to deploy tax instruments, this is often accompanied by complexity. Some instruments are insufficiently effective, in other cases there is a disproportionate loss of revenue and often undesirable behavioural effects occur. It is therefore important to systematically consider and evaluate tax instruments, both prior to introduction and during the evaluation of existing measures. This can improve the choice and design of measures and promote a comprehensible and implementable tax system.

Read the publication: 'An economic assessment framework for tax instruments'
Cpb.nl