Going Dutch

Should America follow the model of the Netherlands on taxation and regulation? Absolutely.


On April 30, during the annual Dutch parade celebrating the royal family, a 38-year-old former security guard named Karst Tates drove his black Suzuki hatchback into a group of spectators, killing six. The intended victim, he told police officers, was the Netherlands' 71-year-old monarch Queen Beatrix. Interviewed by the Dutch paper De Telegraaf, Tates' landlord offered a possible motive: "He had been dismissed and could no longer pay the rent…He was due to have come today to transfer the keys to a new tenant."

If only Tates had waited until the following Sunday, when he could have logged on to his subsidized broadband connection, clicked over to the New York Times website, and read American author Russell Shorto's paean to the cradle-to-grave "Dutch model" of social welfare. If what Shorto tells us is accurate—the state-funded cleaning ladies for new mothers, government-financed summer vacations, free copies of Paul Verhoeven movies—Tates might simply have applied at the local welfare office for a bucket of SSRIs and a top bunk in a Rotterdam borstal.

In this time of economic uncertainty—a phrase that one hopes will be expelled from our vocabulary soon enough—ever-curious journalists are seeking out alternatives to Anglo-American capitalism and finding them in the happy and healthy states of Western Europe. Shorto isn't merely providing an unbiased accounting of how things work in the Netherlands, but wonders "whether some form of [the Dutch system] could be adopted" in the United States. Ezra Klein, a newly minted blogger for The Washington Post, cheered this suggestion, arguing that President Barack Obama should also look at "relative mobility in other Nordic countries"—nevermind that the Netherlands is not a Nordic country.

Shorto's question piqued readers' interest too, becoming the "most emailed story of the week" (and is currently in contention for the most emailed story of the month). And if the permissive Dutch attitude towards drugs and prostitution isn't your cup of tea, the following week the Times offered an A1 story on the wonderful success of Norway—the only country whose citizens shop in Sweden for tax relief—with the unambiguous headline, "Thriving Norway Provides an Economics Lesson." The lesson goes something like this: If your country has a small, relatively homogenous population and enormous oil deposits (a fact introduced in the eighth paragraph), you too can weather the current economic storm.

But back to the Dutch. Like its neighbors to the north, the Netherlands has "succeeded" by greatly reducing state intervention into the economy and, in bargaining with the powerful Dutch labor unions, scaling back generous sick leave and unemployment benefits. The Economist recommends the Dutch model, too—as a model for liberalization of markets and shrinking of the welfare state: "A welfare state that is too generous, and a labour market that is too rigid? Follow the Dutch example of chipping away at the first and quietly introducing flexibility into the second. Taxes that are too high and public spending that defies cutting? Look at the Dutch tax reforms that sharply lowered the burden of direct taxes, and at the finance ministry's tough spending controls."

As the Dutch economist Ruud A. de Mooij points out, public expenditure as a percentage of GDP decreased from 62 percent in 1982 to 44 percent in 2007, helping spur much of the growth in the previous two decades. But with shifting demographics and generous benefits for those who opt out of the job market, the system, he notes, is still in a perilous state:

The Dutch welfare state is under pressure. Ageing makes public finances unsustainable and globalisation tends to worsens[sic] the position of low-skilled workers. At the same time, welfare state institutions seem insufficiently adapted to changed socio-cultural circumstances and cause inactivity among elderly workers, women and social benefit recipients.

Shorto argues that the top Dutch tax rate of 52 percent might seem high (In the 1980s, it was a more Scandinavian 72 percent), but when all of the various taxes in this country are tabulated the differences melt away. But as the Dutch writer Jurgen Reinhoudt points out, Shorto ignores the panoply of indirect taxes that push that rate significantly higher: "New vehicles sold in the Netherlands, for example, are hit with a 40 percent 'vehicle tax' in addition to the 19 percent value added tax that is added to cars as well as many consumer goods sold in the country. Dutch gasoline costs more than $6 a gallon, of which roughly 70 percent goes to the government in the form of various taxes including the VAT. The highest estate tax rate (that some people really do pay) is 68 percent: for the sake of reason this rate will be reduced to 50 percent in the years ahead."

But it is also worth noting that the Netherlands ranks extremely high—12th overall—in the 2008 Index of Economic Freedom. As the report's authors observe, the country "enjoys very high levels of business freedom, trade freedom, monetary freedom, investment freedom, financial freedom, and property rights."

Indeed, many see the country as a tax haven—the use of which, says President Obama, helps "ship our jobs overseas." The Rolling Stones, a billion dollar rock band, have long kept their large amounts of money in the country, due to Holland's exceptionally low rates of taxation on royalties. According to British press accounts, the band has paid a paltry $7.2 million in taxes on earnings of $450 million, which, The New York Times calculates, is "a tax rate of about 1.5 percent, well below the British rate of 40 percent." When Ireland killed the "artist tax exemption," the band U2, despite its consistent agitation for taxpayer-funded aid to Africa, followed the Stones' lead and set up shop with the very same Dutch tax shelter specialists.

Despite budget shortfalls, the Netherlands doesn't seem interested in returning to its 1970s model of confiscatory rates of taxation. When their economy stagnated, the government quickly moved to slash the corporate tax rate from 35 percent to 25.5 percent. (In the United States, it's roughly 40 percent) A recent proposal by the right-leaning government of Jan Peter Balkenende would lower inheritance tax rates from 27 percent to 20 percent for family members, and from 68 percent to 40 percent for non-family members. And with government coffers thinning and an aging population, a recent piece of legislation would push the retirement age from 65 to 67.

Like most acolytes of the European social model, Shorto also focuses on the wonders of the Dutch system of universal health care, while neglecting to mention that in 2006 the government undertook a series of market-based reforms in an effort to save what was once a sclerotic and expensive system.

According to a 2007 World Health Organization report on the 2006 overhaul, the previous system of government mandates suffered from "a high level of government interference (supply side control) leading to inefficiencies and [the] hindering [of] innovation." As Swedish economist Johnny Munkhammar argues, the new system, which allows patients to shop for the best rates amongst private insurance companies, "provides a blueprint for successful, market-oriented healthcare reform."

But still, the system suffers from significant cost shortfalls. Last month, Radio Netherlands reported that, "To make the necessary savings, between 13,000 and 20,000 jobs in the healthcare sector would have to be cut—the equivalent of closing down between eight and 12 hospitals—by 2014." Health Minister Ab Klink, De Telegraaf reports, is "considering introducing a charge to people who visit hospital Accident and Emergency departments without a doctor's referral" to plug holes in the health budget.

While the Netherlands has introduced significant tax reform and market-oriented health care reform, the OECD nevertheless warns that the "economy is now facing labour shortages, related to the greying of the population and the continued weak labour market participation of several groups."

Still, Shorto isn't wrong. There are indeed lessons to be learned from countries like the Netherlands. Which means that supporters of the "European model" must acknowledge that most of these successes—as is the case in many other European countries—are the result of a significant overhaul of base social democratic assumptions about government control of labor markets and health care systems. In other words, as the U.S. moves towards them, they continue to move towards us.

One final thought for Shorto's readers: Netherlands' current prime minister, Jan Peter Balkenende, was elected on a platform of "Mee doen, Meer Werk, Minder Regels." Translation: Participation, more employment, less regulation.

Michael Moynihan is a senior editor at Reason magazine.