By: Madeline Darmawangsa
High tax rates for the wealthy and increased government spending are increasingly being seen by the vocal majority as the clear-cut solution for wealth inequality within a country. Phrases like “eat the rich” have been circulating social media largely in support of these sentiments. The question, however, is how effective are such progressive policies in the equitable redistribution of wealth? And how important of an indicator is wealth inequality in measuring the quality of life of citizens within a country? To answer this, we could examine a country where these sorts of policies have been actualized: the Netherlands.
The Netherlands is often credited as some of the most modern and forward-thinking economies in the world. In fact, many of the progressive policies like high tax rates and high government spending that are being proposed to the U.S. government have been commonplace in the Netherlands for decades. As of 2021, the Netherlands’ income tax could reach up to 49.5%. Some characteristics and offerings of the Netherlands ’ economy include low unemployment, a strong social security system, a universal healthcare system, robust retirement pensions, and allowances for maternity leave. This is why the Dutch economy is regarded by many as a “liberal paradise”. The interesting thing is that despite all their progressive policies, the Netherlands has the worst wealth inequality in the world with a Gini Coefficient of 0.902. To better visualize this, consider the fact that the top 10% controls 60% of net wealth in all of the Netherlands. So how did this shocking reality come to be?
In order to understand how the Netherlands could have such a high wealth inequality, we have to understand what exactly the Gini coefficient measures and how it captures wealth inequality. The Gini coefficient is a statistical measurement of how evenly something is distributed amongst a population on a range from 0 to 1, 1 being the most economically unequal distribution possible. This value is often used to evaluate and represent the wealth or income inequality existing in a country. Income inequality concerns the financial compensation an individual receives annually in exchange for their labor or investment whereas wealth inequality concerns the financial assets an individual has accumulated over the course of their entire life. Intuitively, many people think that if income taxes were to increase, eventually, the wealth gap would close. But the Netherlands shows us income equality doesn’t necessarily equate to wealth equality. The Gini coefficient for income inequality in the Netherlands is merely 0.266 in spite of its incredibly high, and ever-growing, wealth inequality. To better illustrate the Netherlands’ state of income inequality, we can examine the fact that the top 20% in the Netherlands earns only 4 times the income the bottom 20% do. As a comparison, the U.S’s top 20% earns 16.65 times the amount the bottom 20% do.
The Netherlands’ high progressive income taxes, combined with free public education, gender equality advocacy efforts, and comprehensive labor protection laws, among others, have been effective in mitigating income inequality. Yet they remain insufficient to counter the long-standing wealth gap. The issue is that the accumulated inter-generational wealth compounds itself quicker than the Dutch government can reduce the money added to it. The Netherlands’ historical wealth can be traced back centuries ago, with huge money-makers like the Dutch East Indies company. They allowed an extremely small minority of the Dutch population to accumulate astronomical amounts of wealth that are still compounding and increasing the wealth gap to this day. The Netherlands shows us an economy cannot rely on solutions tailored towards income inequality to fix their wealth inequality, especially one as large as the Netherlands’. Instead, policymakers should look into solutions like increasing Estate and inheritance tax.
However, this article isn’t meant to push the false narrative that the Netherlands’ citizens are all miserable as a result of this wealth gap because they aren’t. In many metrics of standards of living, the Netherlands is ranked among the highest in the world. In fact, the Netherlands placed 10th on the social progress index and 8th on the Human Development Index. Thus proving that the Dutch government’s focused efforts to improve citizen wellbeing haven’t been in vain and that even seemingly reliable metrics like wealth inequality alone cannot fully capture the quality of life within a country. To fully capture the full picture or gauge how people are living, a vast variety of metrics encompassing factors like discrimination, poverty rates, literacy rates, life expectancy, safety, and political stability must be taken into account.
It may be easy for someone to look at the Netherlands ’ extremely high wealth inequality Gini coefficient and dismiss their implemented policies as ineffective. Just because they have been unsuccessful in mitigating the Netherlands’ wealth inequality issue, doesn’t mean that they haven’t reduced inequality in other forms. As previously established, the wealth gap shows us only a glimpse of the state of inequality within a nation. This is why it’s crucial to educate ourselves on the expected effects of different policies and how their success can be measured through the appropriate metrics.