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Paying Off Government Debt on the Backs of the Workers (Literally)

The global financial crisis emptied the pockets of European governments. Although the Netherlands had it easy compared to some of its neighbors, the government still ran a deficit of 6% of GDP last year. Now the Dutch are trying to balance their budget by 2015 and one way they hope to increase revenue is by sending tax collectors into the Amsterdam’s famous red light district to get their pound of flesh, so to speak.

The Dutch government has warned women who work window brothels to prepare for a visit from the tax man.  If Dutch window prostitutes charge $65 (U.S.) for a 15 minute session (which they do on average) then, according to the law, they should be collecting an additional $12.35 (19%) extra in sales tax. On top of that they should also pay personal income taxes which for the Netherlands range from 33% to 52% depending on the workers level of income. Given the size of the industry ($865 million in annual income) the tax revenue generated won’t pay down the debt, but it won’t hurt either.

What I am wondering is who will be paying these taxes, the workers or the clients? Usually to answer this question we would want to know the elasticity of demand, which is a fancy way of saying how responsive demand is to a change in prices. For example, if prices increase by 19% because the VAT is applied and demand drops off dramatically in response, then we know demand is very elastic and that sex workers are paying the tax out of their reduction in revenue. If prices increase and demand does not drop off at all, then we know demand is inelastic and the tax is being paid by the clients themselves.

Of course the reality is somewhere in between, the workers and clients will share the cost of the new taxes.

It is interesting though, to think about what factors determine how responsive demand for sex is to an increase in price. For example, if it is easy for a client to find an alternative source of sex then he will probably choose that source more often when prices for market sex increase.  An average guy, looking for average sex, could just go to a bar and be successful if there are promiscuous women available. We here at Dollars and Sex know how promiscuous women are in the Netherlands though (we asked in our survey and I reported the responses a few days later) and it turns out that they are not very promiscuous relative to the average. Other studies have found this as well. So maybe the average guy will still buy sex if prices increase – good news for sex workers and tax collectors.

What about a guy who is not average, who may in fact have a very hard time meeting women in bars, or who is looking for a type of sex act that many women are not willing to do. Those guys will probably not change their demand for paid sex when prices increase. In fact they might not change them at all — in which case the sex worker pays none of the taxes and the client pays it all.

There is one more alternative though. Out of approximately 8,000 sex workers in the Netherlands, only about 3,000 work the small window establishments. Others work in brothels, and they are already taxed, but others work on the street in a sector that still won’t be taxed after this is change is in place. If there is sufficient supply of sex on the street then clients who don’t want to pay the tax will take their businesses there — bad news for window sex workers, bad news for the tax collector, and bad news for a city that is already trying to clean up its image.

The problem with all these policies is that there just isn’t enough analysis being undertaken. I think that what the European Union needs to do is to establish a sex research unit. I know just who they should hire to run it — I have always wanted to live in Europe.

Image courtesy of Flickr user nicasaurusrex.

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