Special attention should be given to the interaction of the mark-tomarket tax and the corporation tax. In principle, the corporation tax would become redundant, because distributed and retained prots would already be taxed under the mark-to-market tax. The incentive to retain prots would be eliminated. If the corporation tax were retained and interest remained deductible in ascertaining taxable prots, equity would be discriminated against compared with debt. The corporation tax, however, could be reformed to function as a withholding tax for the mark-to-market taxwhereby the tax on the return on equity as well as debt would be levied at source. 8.8 Evaluation and Preferred Alternative

8.8.1 Comparative Analysis The Dutch presumptive capital income tax does not include the investor-specic investment premium (which can be associated especially with wealthy investors) in the tax base. Also, the government does not share in the good and bad luck of investors. The presumptive capital income tax worsens the discrimination of equity vis-a`-vis debt, because the tax on equity income at the corporate level is no longer offset by the exemption of capital gains at the personal level. Furthermore, the small tax base distorts economic choices, encourages tax arbitrage, and harms revenue. Last but not least, the presumptive capital income tax harms efforts to coordinate capital income taxes within the European Union. Whereas the Netherlands is resorting to ex ante taxes on a presumptive return, other member states are strengthening ex post taxes on capital income, including capital gains taxes and withholding taxes.

The Dutch Presumptive Capital Income Tax The major drawback of a conventional capital gains tax is that taxpayers are encouraged to defer the realization of capital gains and to accelerate the realization of capital losses. Complicated antiavoidance provisions are often introduced to forestall this tax-driven behavior. Deferral and lock-in can be mitigated, but not eliminated, by deeming realization to occur at death and by charging interest on the deferred tax. This points in the direction of a mark-to-market tax. Generally, the problem with a mark-to-market tax is that it is difcult to apply to real estate (including owner-occupied housing) and small businesses due to serious valuation problems. For these assets, a capital gains tax regime (preferably with a rough-and-ready interest charge on deferred taxes) would have to be maintained.

The valuation problems are smallest under a capital gains tax, as long as no effort is made to charge interest on the deferred tax that correctly reects the buildup of the gains over the holding period. In that case, the market generates the required information when the asset changes hands. For liquid nancial products, nancial markets provide the information required for a presumptive capital income tax (net wealth tax), a capital gains tax that attempts to charge interest as gains accrue, and a mark-to-market tax. Illiquid assets, however, have to be valued on a discretionary basis under these income tax taxes. includes hard-to-value personal real estate in its base, including owner-occupied housing (albeit taxed in box 1 instead of box 3). This implies that the Dutch government believes that real estate, as well as liquid nancial products, can be valued annually for tax purposes. Under the old net wealth tax, moreover, the equity capital of small businesses also had to be valued.