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Tax Reform in Belgium David Carey OECD Economics Department Working Papers No. 354 Tax Reform in Belgium David Carey https://dx.doi.org/10.1787/635485865253 Unclassified ECO/WKP(2003)8 Organisation de Coopération et de Développement Economiques Organisation for Economic Co-operation and Development 15-May-2003 ___________________________________________________________________________________________ English text only ECONOMICS DEPARTMENT Unclassified ECO/WKP(2003)8 TAX REFORM IN BELGIUM ECONOMICS DEPARTMENT WORKING PAPERS NO. 354 by David Carey All Economics Department Working Papers are now available through OECD's Internet Web site at http://www.oecd.org/eco text only English JT00144346 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format ECO/WKP(2003)8 ABSTRACT/RÉSUMÉ TAX REFORM IN BELGIUM Belgium has a heavy tax burden which has mainly fallen on labour as international tax competition has limited the scope to which this burden could be imposed on capital. This has raised concerns about possible adverse labour market impacts from such high tax rates. In view of these concerns, the government has made substantial cuts in employers’ social security contributions, has reduced employees’ social security contributions and, in the context of a personal income tax reform, has introduced an earned income tax credit. All of these measures have been focused on low-income earners, maximising their favourable labour-market effects by increasing the likelihood that they produce lasting reductions in labour costs and/or reductions in benefit replacement rates. Further reductions in labour- income taxation targeted on low-income earners should be made as budget room becomes available. Narrowing the range of goods and services that are not subject to VAT would help to make more budget room available for such tax cuts as well as reducing distortions in consumption choices. So too would some increase in effective tax rates on second pillar savings, which are in fact negative on the condition that contributions have benefited from tax deductions. The government should also continue to reform the corporate tax system to ensure that Belgium remains an attractive site for direct investment. JEL classification: H2, E62, J32. Keywords: Taxation, tax policy, Belgium. ************ LA REFORME FISCALE En Belgique, la charge fiscale est lourde et pèse essentiellement sur le travail, dans la mesure où la concurrence fiscale internationale a limité la possibilité de faire peser cette charge sur le capital. Cela a suscité des craintes quant à l'incidence défavorable que pourraient avoir des taux d'imposition aussi élevés sur le marché du travail. Compte tenu de ces préoccupations, le gouvernement a sensiblement réduit les cotisations patronales de sécurité sociale, ainsi que celles des salariés, et dans le cadre de la réforme de l'impôt sur le revenu des personnes physiques il a instauré un crédit d'impôt sur les revenus d'activité. Toutes ces mesures ont été ciblées sur les titulaires de faibles revenus, de manière à maximiser leurs effets favorables sur le marché du travail en rendant plus probables des réductions durables des coûts de main-d'œuvre et/ou des taux de remplacement. D'autres réductions de l'imposition des revenus du travail ciblées sur les titulaires de faibles revenus devraient avoir lieu dès que la situation budgétaire le permettra. La réduction du nombre de produits et services qui ne sont pas soumis à la TVA contribuerait à accroître la marge de manœuvre budgétaire pour de telles réductions d'impôt tout en réduisant les distorsions dans les choix des consommateurs. Il en serait de même d'une augmentation des taux d'imposition effectifs de l'épargne du "second pilier" qui sont en fait négatifs, dans la mesure où les cotisations ont bénéficié de déductions d'impôt. Le gouvernement devrait par ailleurs continuer à réformer le système d'impôt sur les bénéfices des sociétés afin de faire en sorte que la Belgique reste un site attractif pour les investissements directs. Classification JEL : H2, E62, J32 Mots clés : Fiscalité, politique fiscale, Belgique. Copyright OECD 2003 Applications for permissions to reproduce or translate all, or part of, this document should be made to the Head of Publications Service, OECD, 2 rue André Pascal, 75775 PARIS CEDEX 16, France. 2 ECO/WKP(2003)8 TABLE OF CONTENTS ABSTRACT/RÉSUMÉ .................................................................................................................................. 2 TAX REFORM IN BELGIUM ...................................................................................................................... 5 Forces shaping tax policy............................................................................................................................ 5 Main features of the tax system................................................................................................................... 7 Main options for reform ............................................................................................................................ 35 ANNEX I: THE IMPACT OF AN INCREASE IN THE LABOUR TAX WEDGE ON THE LABOUR MARKET ..................................................................................................................................................... 39 ANNEX II: PERSONAL INCOME TAX REFORM................................................................................... 45 ANNEX III: EFFECTIVE TAXATION OF SECOND-PILLAR SAVINGS .............................................. 51 ANNEX IV: REDISTRIBUTION THROUGH THE TAX-BENEFIT SYSTEM ....................................... 52 Boxes Box 1. Tax treatment of long-term saving1 ............................................................................................... 22 Box 2. Corporate income tax reform......................................................................................................... 33 Box 3. Recommendations for tax reform .................................................................................................. 38 Box A1. Unemployment benefit replacement rates .................................................................................. 40 Box A2. Minimum wage rates .................................................................................................................. 42 Box A3. Results of cross-country studies on the labour-market effects of the tax wedge on labour........ 43 Box A4. An illustration of the functioning of the marital quotient and transfer of the exempted quotient in the case of a married couple without children....................................................................................... 46 Box A5. General schema for calculating personal income taxes .............................................................. 47 Tables 1. IMF estimates of the impact of changes in the tax wedge on employment 2. Budget cost of reductions in social security contributions 3. Impact of tax and social security reforms since 1999 on net replacement rates for low-wage earners 4. Valuing unquoted stock options 5. Productivity of value-added taxes 6. Effective tax rates on investment in owner-occupied housing 7. Tax expenditures, nominal and effective corporate income tax rates 8. AETR for various locations of an investment made by a parent located in a country using an exemption system 9. New company-tax scales for SMEs 3 ECO/WKP(2003)8 10. Direct investment tax incentives at a corporate income tax rate of 30 per cent A1. Net replacement rates in the first month of benefit receipt, 1999 A2. Net replacement rates 60 months after claiming benefit, 1999 A3. Statutory minimum monthly wages A4. Summary of recent studies examining the effects of the tax burden on labour A5. General tax rebates on replacement income A6. The general rule for the vertical limitation of tax rebates on replacement income A7. Personal income tax scales, before and after the reform A8. Timetable for implementation of personal income tax reform A9. Budget cost of personal income tax reform A10. Gini coefficient for the working age population, mid-1990s A11. Effect of reform on the progressiveness and redistributive effect of the personal income tax Figures 1. Government outlays 2. The evolution of the tax burden and tax mix 3. Effective tax rates on labour income 4. Marginal effective tax rates on labour income 5. Employers' social security contribution rates, 2002 6. Employment ratios by level of educational attainment 7. Marginal effective tax rates on low salaries after the tax reform 8. Gross assets of pension funds and insurance companies and financial assets of households 9. Share of owner-occupied housing in selected OECD countries 10. Corporate income tax rate and tax ratio 11. Gap between effective and nominal corporate income tax rates 12. Average effective tax rates for small and medium enterprises 13. AETR for parent-subsidiary case 14. Change in AETR resulting from the use of a Belgian co-ordination centre A1. The labour market effects of an increase in the labour tax wedge A2. Cumulative change in the personal income tax ratio, 1990-2005 A3. Redistributive effect, average rate and progressiveness of the personal income tax A4. Tax reductions by level of salary 4 ECO/WKP(2003)8 TAX REFORM IN BELGIUM1 by David Carey2 1. Belgium has a heavy tax burden, owing to a relatively high public spending ratio, which is inflated by the debt-servicing costs associated with its large public debt. As international tax competition
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