- c / (1 - r).
Figure 9 and Figure 8 in Book III plot the tax situation and the effect of M and B for curvature c = 0 (in the considered range), and for Holland 2002.
Indexation of exemption
We already mentioned the OECD (1986) report that taxes generally are indexed on inflation. This indexation though is not consistent over time. The Economist (1991:45-46) reported:
“the most intriguing proposal now doing the rounds in Congress (...) is to increase the personal tax exemption (the amount by which taxable income is reduced for each person in a household). In 1948 the exemption was set at $600 a person; in 1990 it was $2050. According to recent evidence before the House of Representatives select committee on children and the family, had the exemption been indexed from 1948 it would now be worth $7800.”
The Dutch data had already been given in Table 4. Indexation on inflation need not be optimal. We already looked at indexation of subsistence, and it might be wise to index taxes on the same base as gross income, as suggested by property (13.3e) and the discussion on subsistence in chapter 27.
A note on partners
[Statutory taxes generally take account of the household situation. Sometimes tax terminologies suggest an individual treatment. Regard for example the Dutch tax code. This states that partners can ‘transfer their exemption]’ to the money earning partner. You may check that Table 4 on the Dutch situation indeed shows an exemption for partners, in the 1997 column, that is double the exemption for singles. The situation in 2002 is a bit more complex due to an EITC.
Note, though, that the Dutch minimum wage roughly is set at the income level for partners. Singles have less net income since their exemption is lower, but they are not allowed to work at a lower gross minimum wage that might be feasible, with the same net income by assigning them the same exemption as for couples. The Dutch concoction of ‘exemption transfer’ in fact is extremely silly. It is even more surprising that it has been introduced while all Dutch tax specialists kept a straight face. [95] The concoction also complicates the Dutch policy debate, since a proposal to raise exemption to subsistence now associates, in Dutch minds, with exemption for couples of double subsistence (which is exorbitant).
The best tax format would start with exemption at subsistence for singles.