It was the slow rise of subsistence B and the lagging of exemption x in the 1950-1975 period that caused a multiplied rise of M, creating the Tax Void. Also, since the earnings distribution is nonlinear (lognormal), there was an even sharper nonlinear increase in unemployment.
Figure 13 shows that the real values stagnate since about 1980, and that the development since then is determined by inflation. Since inflation does not occur in the rsi index, the real situation is stable. For example, the gross-to-net ratio at the minimum since 1980 is quite constant.
Note too that this in a sense presents a difficulty. The problem with the minimum wage was caused before 1980, and policy makers wanting a solution in 2002 will rather look at the last decennium rather than to the 1950-1975 period.
Marginal tax rate & VAT
While the above considers exemption x, the analysis can be extended with an analysis on the marginal tax rate r.
Many economists hold that a high marginal tax rate is a disincentive for labour effort. They frequently propose a change from the income tax to the Value Added Tax (VAT). If we assume the same total tax revenue then the VAT might allow for a lower marginal tax rate, for the reason that the VAT has no exemption. At least, that is commonly conjectured.
Above analysis already exposes one flaw to the argument ‘in favor of the VAT’. Having no exemption means a higher minimum wage ! So, those tax theorists who propose a shift from income tax to VAT tend to neglect an important part of labour market economics. Note that a higher VAT on luxuy cars does not affect the subsistence worker who cannot afford these, and hence there is some truth in the statement that a VAT sometimes can be preferred. However, once we have solved unemployment by proper labour market policies, the discussion about income tax or VAT could be done in terms of fiscal properties only, and it might quickly appear that a low VAT of say 5% suffices. [49]
Secondly, it is said that a VAT taxes profits too and thus seems to allow a general reduction of the price of labour. But it raises costs disproportionally for the lowly productive (who generally work with less capital).
Figure 14 shows the development of the relative revenue shares of Dutch income tax and VAT for a selection of years (i.e. 1975, 1980, 1985, 1990, 1997 and 2003). The Dutch minimum wage problem has worsened also by this development.