Holland is the example again. In 1951, exemption for a single person household was € 354 and for a couple without childern € 463. At that time there was no official minimum wage, but it can be taken at that value. The price level in 2002 (1951=1) is 6.25 and the wage index 2002 is 25.59. This allows us to construct Table 4.
Table 4: Development of tax exemption in Holland
| Euro’s | 1951 | 1997 | 2002 |
| Inflation index (%) | 100 | 545 | 625 |
| Wage index (%) | 100 | 2082 | 2559 |
| Exemption, single person | 354 | 3223 | 8025 |
| Idem, price adjusted | 354 | 1930 | 2211 |
| Idem, wage adjusted | 354 | 7369 | 9060 |
| Exemption, couple without children | 463 | 6445 | *13116 |
| Idem, price adjusted | 463 | 2524 | 2892 |
| Idem, wage adjusted | 463 | 9638 | 11850 |
* Dutch readers can find the computation in Colignatus & Hulst (2003)
Till 1997, official exemption € 3223 lagged strongly behind the wage adjusted 1951 value € 7369. In recent years the gap has been reduced, but the 2002 official exemption of € 8025 still lags more than € 1000 behind the wage adjusted 1951 value. Most important, it lags € 4500 behind the (single person) net minimum wage of € 12500.
Taxes
If we index tax parameters on inflation only, then this affects exemption x in the Bentham tax function, and thus x should be included in the function call.
|
P = price index
x[0] = exemption at the base year xi = real exemption index | (13.2a) x = x[0] xi P (and here xi = 1) (13.1b’) Bentham[y, x] (13.2b) Bentham[y, x[0] P] = r (y - x[0] P) |
We also write the tax function as T[y, x] and net income as Net[y, x].