The paper, Tax Incentives for Migrants With Mid-Level Earnings: Evidence From the Netherlands, was co-authored with Paul Muller (VU University Amsterdam). Their work will be published soon in an upcoming edition of the American Economic Journal: Applied Economics.

The researchers analysed how this income tax incentive influences migrants' decisions and wage outcomes. Most migrants meeting this requirement qualify for a scheme that exempts 30% of their earnings from income tax. They used data obtained after a 2012 reform in the scheme that introduced an income threshold (€35,000) for eligibility. Timm, Giuliodori and Muller found that the 2012 legislative reform made the Netherlands a more appealing migrant destination for people who earn €35,000 or more.

Significant increase in migrant numbers

Their conclusions are supported by a significant increase in the arrival of migrants with incomes just above the threshold. In fact, the inflow of migrants earning up to 10% more than the threshold doubled. The strongest effects are seen among migrants from outside the EU and those beginning employment in the business services sector. In contrast, the impact on migrants earning just below the threshold is small and statistically insignificant. The researchers believe that these changes are mainly driven by a rise in the number of migrant arrivals, with wage negotiation playing a smaller role. They estimate a migration elasticity (capturing the relation between the percentage change in migration after the reform and the percentage change in the net-of-tax rate) of between 1.6 and 2.7. This is higher than most studies focused on high-income migrants.

Debate

These findings are highly relevant to the ongoing debate around the 30% ruling. In 2019, the duration of the scheme was reduced from 8 to 5 years. And a cap on the maximum salary was introduced in 2024. Since the research shows a significant increase in migrant arrivals following the scheme's expansion in 2012, scaling it back might reduce migrant numbers. This could have an impact on the anticipated budgetary savings. ‘Our analysis shows that the broader availability of the scheme in 2012 actually led to higher tax revenues. The increase in tax-paying migrants more than compensated for the lower tax collected per individual’, explains Giuliodori.