Interview with Dr. Bas Jacobs

A couple months ago, the Estimator had the privilege of interviewing the Sijbren Cnossen Professor of Public Economics at ESE, Bas Jacobs. And as of June 2022, prof.dr. Jacobs will be appointed as the Professor of Public Economics at the School of Economics and Business at VU Amsterdam. Professor Jacobs has held a crucial role in the Dutch economic policy debate with several renowned works on optimal taxation and income redistribution among many other fundamental economic topics. During our talk we got the chance to hear about his student journey, as he recited many obstacles he had encountered and how he had overcome them. We also got the opportunity to ask about his research, where he drives inspiration from and the topics he’s most passionate about.

First, let's take a couple steps back to your really early days as a student. Could you tell us a little about your journey then?

Of course, well, I started studying econometrics and didn’t like it much. I thought the combination of mathematics and economics was something that would attract me, but in the end I felt that I only studied mathematics. I got bored in the first year, so I switched to economics to at least get a first year Bachelor’s degree. All the coursework in economics was very easy. I could do the mathematics, like we say in Dutch, with two fingers in my nose.

I studied at the University of Amsterdam and, just like in Rotterdam, it was a massive programme with more than a thousand students in each cohort. In the second year, I lost my motivation again and I was in the pub more often than I was in the lecture room. During that second year, I got to know my first girlfriend who was studying art history. We were both interested in Greek philosophy so we decided to enrol in philosophy in the third year. And, studying philosophy finally gave me the inspiration and motivation that I was missing in economics.

However, in my third year, I followed a course in macroeconomics taught by Rick van der Ploeg, currently a professor at Oxford University and former State Secretary of Culture. He also was financial spokesman for the Labour Party (PvdA). During those years he was one of the most famous Dutch economists; extremely funny, bright, and relevant. And this is when the penny dropped:  ‘het kwartje viel’. At that moment, I stopped my study in philosophy as I was studying economics like a maniac. I finally got enthusiastic about it. From that moment on I never scored lower than an 8 and went straight into my PhD.

Back then, doing a PhD was different than it is nowadays. Professors had PhD positions at universities at which you could apply with a Master’s degree. There was no real graduate education program like we have now. I applied for three PhD projects. But, actually, I was turned down for all three before I was accepted. Nowadays, if you want to do a PhD you need to enrol in a graduate school like the Tinbergen Institute. After finishing a Master or an MPhil in research, then you start working on your PhD thesis.

How did that not discourage you, being turned down? How did you keep up your spirits?

I was very disappointed, especially because of the reasons they gave me. Actually, this is a funny story. I only got enthusiastic about economics during the third year, after following the macroeconomics course by Rick van der Ploeg. He had a PhD position together with Casper van Ewijk, my Master thesis advisor. So I applied for their position and was turned down, because of my low grades in the first two years. They doubted whether I would have the perseverance to complete a full PhD thesis. I also applied for a PhD position at ESE in Rotterdam under the supervision of Sijbren Cnossen and Lans Bovenberg, but was also turned down there. Remember those two names because I will get back to them.

So there I was, in the midst of writing my Master's thesis, and was turned down everywhere I applied to.  I dropped writing my thesis for several months because I was so demotivated. But, then after a while I realised that I really did want to pursue an academic career. So I finished my Master’s thesis as well as I could, because I wanted to try to get a PhD position the following year.

When I nearly finished my Master’s thesis, my thesis supervisor Casper van Ewijk, who initially declined my PhD application, suddenly raised the question whether I was still interested in doing the PhD. So in the end I did get the PhD position with Rick van der Ploeg and Casper van Ewijk and started working on it. They may have decided to accept me because they saw that even after turning me down, I still finished my Master’s thesis. I wrote the best Master’s thesis of the economics department of the University of Amsterdam of that academic year. This apparently gave them the conviction that even after such a setback I was able to get back on track and do research because that was obviously what I wanted to do.

However, after one year in my PhD, Rick van der Ploeg became State Secretary of Culture, and Casper van Ewijk became deputy-director of CPB Netherlands Bureau for Economic Policy Research. Hence, I was left more or less without a PhD thesis advisor. So I approached Lans Bovenberg and he accepted to be my second PhD thesis advisor and I graduated in 2002 at the University of Amsterdam.

Now, there is a funny twist in the story. When I moved houses in Amsterdam, in 2011, I was clearing up my attic and I found a letter from Erasmus University. I couldn’t remember what it was, but when I opened the letter, I saw that it was the rejection letter of my PhD application at EUR from Lans Bovenberg and Sijbren Cnossen. However, Lans Bovenberg had been my second thesis advisor. And in 2008 I would be appointed here at ESE on the Sijbren Cnossen chair in public economics! This year, I have even published a book at Oxford University Press jointly with Sijbren Cnossen.

So all these people that initially rejected me for a PhD position have become intellectual fathers, co-authors and dear friends. This is an amazing story about how things can go in life. Despite the setbacks of all those people that I admired, and who initially upheld my development, I finally ended up working with them. And I am honoured and pleased for that.

The moral of this story is that at the moment you find something that you really think is interesting, which grabs you, and it is what you really want to do; don’t give up pursuing that dream or that interest. Just go for it. You never know what is possible. Just follow your inspiration.

When I look at younger people nowadays I think they’re so often conflicted about what they want to do. They want to keep all the options open. For example, you’re massively doing double degrees. However, while maximising options, you’re postponing the moment you have to make a choice. Important ones. This also gives a lot of existential unrest; ‘what am I going to do next year, or in three years?’

I also think that this makes you feel shattered. Your attention is divided among so many things. It is not necessarily the greatest feeling to live your life. The feeling that you cannot commit to one thing to keep all your options open.

So my advice for younger people is: just go for one thing that really grabs you, that really excites you and dive deep into it, giving it the best you have. You can always change course if you figure out “well, it wasn’t for me”. In the end, the road that you travel is the most important part, not the destination.

I have done many job interviews, with PhDs but also with assistant professors, people that work in academia. What separates one applicant from the others is not one tenth or half a point extra on a grade-point average. No, it’s what you bring in personality, in curiosity, in personal drive, in intellectual sparks. That is far more important, also for later success, than only your grade list.

Throughout your years as an influential economist you’ve researched numerous fields ranging from optimal taxation, income redistribution, welfare economics, environmental tax policy; what has been the leading force behind your research?

I’m going to answer this question with a quote by Jan Tinbergen. Tinbergen said, “I always get my inspiration by looking out of the window”. Trying to understand what was happening in the real world and how it can be improved. Even though Jan Tinbergen was a towering academic — he was basically the founding father of modern econometrics, together with Ragnar Frisch —  he was  inspired by real-world issues.

Tinbergen was not only an academic, but he was also the founder of the CPB, which is the most important policy advisory body in this country. And this has been so since it started in 1945. Policy advice, based on academic research, theory and empirics, to improve economic outcomes. Like Tinbergen, I also want to bridge academics and policy analysis. I derive my inspiration from real-world issues. For example, I have done research on environmental taxation, income distribution and education, because these are all important real-world policy issues.

I’m not saying all academics should do that. There are very good academics that have a laser-focus on, for example, refining game-theoretic equilibrium concepts or proving that the best linear unbiased estimator is indeed the best unbiased estimator. Such research is not my cup of tea. However, universities need to have different types of academics that derive their inspiration from different sources. Mine is the real world.

What excites you most about your research and what challenges do you face often?

I have a story about that. I told you about the PhD research position that I have applied for and that I eventually got. That was on education finance. In my PhD thesis of 2002 I analysed the income-contingent loan system. In part based on my research, the loan system was introduced in the Netherlands in 2015. The Rutte IV government has plans to abolish it, so they will kill my intellectual baby. I am not sure whether you would regret that. But never mind. During the writing of my PhD we had a raging discussion in the Netherlands in 1997 about the introduction of the new tax system. It was implemented in 2001 after a couple years of discussion.

One of the main elements of the tax reform 2001 was to tax wealth and not the income from wealth, capital income. Before 2001 we taxed interest, dividend, rental incomes from secondary homes. Moreover, we didn’t tax capital gains. If you would have an asset, and you make a profit by selling it with a gain, this gain was not taxed. Many other capital gains, such as selling your house with a profit, were not taxed. That was a major problem in the tax system before 2001. As capital gains were untaxed, all kinds of financial products appeared that transformed taxed dividends into untaxed capital gains. So you wouldn't pay any tax at all. The genius, and I say this with sarcasm, of the tax reform in 2001 was, well… since we cannot tax capital gains, we were not going to tax capital income from interest, dividends, and rental income either. We would only tax wealth. We euphemistically call this a presumptive capital income tax. However, we just tax your imaginary capital income, by imputing a return on your assets. I was vehemently against that tax reform. But I was 24 years old at that time. All economists, both professors in tax law and professors of public economics, were against this tax reform, but it was implemented nevertheless.

I got so upset that this happened. During the discussions of the tax reform between 1997 and 2001, I shifted my PhD research agenda from macroeconomics and economics of education to public economics. Half of my PhD thesis turned out to be on taxation and human capital and the other half is on higher education finance. And, the taxation part was inspired by the debate on the Tax Reform 2001.

At this very moment, the High Court in the Netherlands has ruled that the wealth tax in box 3, this tax on imaginary returns, is illegal..

The Dutch tax system needs to be fixed now. So I am writing articles like crazy about what should be the best way to tax capital income and capital gains. I am doing academic work trying to quantify why a wealth tax is worse than taxing capital income to correct inequalities and to tax income in the most efficient way. I also write a lot of policy and opinion pieces about how the tax system should be reformed. There is a close connection between what I do as an academic, what I write as a policy economist, and what I debate in the public arena. Actually this subject is so close to my heart because it upset me 25 years ago. One could even say that I have become a professor of public economics because of the tax reform of 2001.

Now you have a chance to really develop your research in that field.

What comes out in economic policy from academic research is always a bit random. I referred to the higher education finance reform, which was part of my PhD thesis. I pushed the idea of income-contingent loans quite a bit in the policy arena. I think I have also influenced some political parties to introduce such a system in the Netherlands. I am a strong advocate for income-contingent loans like they have introduced in Australia, New Zealand and in the U.K., where students borrow from the government and they repay a fraction of their income to cover principal and interest. Repayments are automated through the tax system, where employers withhold a fraction of worker’s incomes. Most graduates don’t even know that they are repaying their study loan. At some moment they will simply get a letter saying “You repaid all your student debts. Repayments will no longer be withheld from your salary”. In the unfortunate circumstances students are unable to repay the loan during their lifetime, the remainder is either financed by a risk premium on the interest rate or financed from general tax revenue. Income-contingent loans are a superior way to guarantee access to higher education in an efficient and an equitable way.

Some version of the loan system was introduced in the Netherlands in 2015, long after I graduated as a PhD. Unfortunately, repayments were not automated via the tax system and were not fully income-contingent, as they still contained a strong mortgage-type repayment structure.

The loan system had been introduced mainly for budgetary reasons: to cut outlays of the government. In hindsight, in 2022, it is quite difficult to imagine that the governments, in the Netherlands and throughout Western Europe, were so much into fiscal austerity. Austerity was not a wise policy at that moment in time.

I advocated income-contingent loans to raise investment in higher education, not cut government expenditures. Since the returns to higher education have been rising for decades, it is efficient to invest more in education, not only by the public, but also by the private sector. So, I think the motivation why the government implemented the loan system was not correct. Indeed, it largely prevented cuts in spending on education, but I preferred a substantial increase in investment in higher education instead.

The loan system will now be abolished. While there was no shred of evidence that the loan system harmed accessibility of higher education. The inevitable consequence is that students from the well-to-do parts of the population will receive higher subsidies in the form of grants. However, about three quarters of all students in higher education come from the richest half of the population. A former Minister of Finance once famously quipped: “It is the butcher who is paying for the education of the lawyer’s son”. This is inequitable from a generational perspective. Moreover, people with a higher education end up having higher lifetime incomes. They are being subsidised by the people that have lower lifetime incomes.

If you want to promote access to higher education, a great and noble goal, you need to start much earlier in life. The real problem with access is that many youngsters do not obtain the higher secondary education degree that would qualify them for enrolling in higher education. Selection takes place much earlier in life, around age 12. If you want to promote enrollment of socioeconomically disadvantaged groups into higher education and guarantee equality of opportunity, you should make sure that they get into higher secondary education first.

So the grants aren’t really going to the correct target group.

No, because if children have a higher secondary education degree, about 85-90 percent of them goes on into higher education. In economic terms, the deadweight loss of the study grant is massive. Moreover, it is a regressive income transfer; especially the children from rich backgrounds will benefit. I certainly do think the younger generations have tough times and I think the covid crisis has hit your generation the hardest. But I think that reintroducing basic study grants is a stupid idea from a pure policy perspective. Is this the best way to guarantee access? I don’t think so.

What research topics are you most interested in these days?

As I explained, I am currently writing a lot about taxing capital income on wealth. I am also revising a paper on taxing on capital income when people make different returns on their capital. There are rich individuals who can get access to all kinds of investment opportunities that even professors of economics don’t have access to. For example, I cannot go to a private bank to have my wealth managed by a portfolio manager, because I don’t have sufficient amounts of wealth to put up front. In the data you see that wealthier people make higher returns on their assets. Moreover, this is not a pure portfolio effect as they also take more risks. Even after controlling for their portfolios you see they make higher returns. Also people with higher earning ability, that is: people with higher labour income, generate higher capital returns. So how should you then tax capital income? That’s the question of the paper that I am currently revising, which I’m writing together with Aart Gerritsen and Kevin Spiritus, who are also working at ESE.

Sometimes it can be frustrating that you’ve been writing and saying things for 25 years and still be worried that policy makers are moving in completely the wrong direction. Therefore, if you want to make an academic career and try to have a policy impact, you need to be truly intrinsically motivated.

What would your advice be for econometrics students interested in specialising in research?

I’m the wrong person to ask. For me, econometrics is a tool. I think it’s not good that we’ve separated these fields. For me econometrics is an integral part of economics where mathematical tools assist economists in understanding economic theory better or allow them to develop better tools to answer empirical questions. The tools shouldn’t be separate from economics. This separation does not exist anywhere else on the planet. This division is also the inheritance of Tinbergen. In the Netherlands, the field of econometrics is founded and ever since we have had this separation of econometrics and economics.

Moreover, I think learning only tools is boring; they are only useful when applied to interesting questions. What I always find intriguing, is that many economics students are afraid of mathematics, while the econometrics students are not. But the economics students often ask better questions, because they’re not mathematics driven, but substance driven. I know that econometrics students are smart and that they know how to do mathematics and statistics. But my advice for the econometrics students would be to learn how to ask the right economics questions.

Following your research on the tax system in the Netherlands, you came to the conclusion that the Dutch tax system actually favours the middle class over the poor. Could you elaborate shortly on that and what the implications of your discovery have been?

I can do that, but I also have a video online you can watch.

What we try to do is use a model of optimal income redistribution. The government tries to maximise social welfare, which encompasses some idea of justice, subject to the fact that they can't spend more than tax revenue collected, and subject to the behavioural responses of people when the government starts taxing them. This is the standard optimal tax exercise: maximising the social objective subject to budget and behavioral constraints.. From this follows an optimal tax schedule. One can also reverse engineer the question: Suppose that I observe a tax schedule, given the behavioural responses and the constraints, what would have been the objective of the government had this tax system been optimally chosen? From this exercise can actually figure out who the government cares for most in the tax and transfer system. That is, one can compute how much worth a euro is to each income group in society, which is what we calculated for the Netherlands. We find that a euro for the middle income groups is worth nearly twice as much as the poor. This means that redistributing from the very poor to the middle income groups raises social welfare according to the current government objective. Our conclusion is that middle-income groups are actually favoured over the working poor in the tax transfer system. It’s really weird that the government cares more for the middle-income groups than for the poor. This finding is not consistent with any theory of justice that I am aware of. Whether it's welfarism, Rawlsianism, or ideas about equality of opportunity. This finding can, in my view, only be explained by political economy: the middle-income groups are pivotal in the elections. No mainstream political party can ignore them. And they cater to the interests of these voters by means of the tax and transfer system.

We would like to thank professor Bas Jacobs for taking the time to partake in this interview and share his thoughts and experiences. We congratulate him on his recent appointment as professor of public economics at the VU Amsterdam and wish him success in his future endeavours.

About this article

Written by:
  • Begyum Akyol
  • Lala AlAsadi
  • Max Hedeman Joosten
| Published on: Jun 07, 2022