The redistributive character of taxes and social security contributions

The article aims to explain the redistributive character of taxes and social security contributions in Belgium, and to demonstrate the mechanisms behind that redistribution. Compared to the other EU-15 countries, Belgium has less primary income inequality. Moreover, there is a relatively high degree of redistribution in Belgium, so that – after taxes, social benefits and social security contributions – the disparities are among the smallest in Europe. As in other countries, this income redistribution is effected primarily via social benefits. However, redistribution via taxation on income also plays a very important role. The most strongly redistributive tax in Belgium is personal income tax, which is highly progressive. That is due principally to the structure of the tax scales and the amount of the tax allowance, and to the reduction in taxes on replacement incomes. The influence of social security contributions on the redistribution of income is relatively slight, although it is greater than in the majority of the EU-15 countries. VAT, which accounts for the bulk of indirect taxes, is slightly progressive in relation to expenditure, owing to the rate structure whereby the reduced rate and the zero rate apply to goods and services which are consumed to a proportionally greater extent by low-income households. Conversely, in relation to disposable income, VAT is degressive. That is because the savings ratio increases with each income decile. Excise duties are degressive, in relation to both household spending and household income. This study also illustrates the fact that tax measures are seldom neutral in their effect on income redistribution. However, this effect is clearly dependent on the practical aspects of this type of measures. The personal income tax reform approved in 2001 and the introduction of the work bonus increased the progressive effect of the compulsory levies on earned income and reduced the average rate of the levy. While the impact of increases in excise duties on fuel is more mixed in terms of redistribution, the recent increases in excise duty on tobacco have accentuated their degressive character.taxes and social contributions, income distribution, redistributive effects

Economic impact of the public debt

Following the financial and economic crisis, there was a marked increase in the public debt of the euro area countries, the United States, the United Kingdom and Japan. In addition, without a change of policy, the public debt of those countries would maintain an upward trend, a key factor being the rising costs associated with population ageing. The article analyses the risks and implications of the expansion of the public debt currently evident in most of the advanced countries. The difficulties which certain euro area countries are experiencing in raising finance on the markets illustrate some of those risks. After outlining the movement in the public debt in the advanced countries in recent years, a simulation is produced in view of showing the future debt pattern in the absence of any change of policy. This exercise clearly highlights the potentially exponential growth of the public debt in most of the advanced countries. Next, the impact of the public debt on economic activity and inflation is examined. That impact appears to be very heavily dependent on the circumstances, which may vary greatly over time and between countries. When looking at the impact of the pattern and size of the public debt on economic activity, it is always important to distinguish between the short and the long term. Finally, the article sets out the need for fiscal consolidation and appropriate strategies for achieving that. The strategy focuses on three aspects: fiscal consolidation aimed at reducing the public debt, boosting the employment rate and productivity, and reform of the pension systems, health care and care of the elderly. For most of the advanced countries, large-scale reform programmes will be necessary in order to restore sustainable public finances. Some countries have already implemented consolidation measures, while others have yet to put most of the measures in place.public debt, deficit, economic growth, government expenditure and revenue, taxation, fiscal policies

Recent trends in corporate income tax

The article describes the recent international developments regarding the corporate income tax and the way in which the Belgian government is trying to respond. For this purpose, it begins by discussing the various indicators which measure the tax burden on corporate profits. Next, it illustrates the trend towards declining statutory corporate tax rates throughout Europe in the last two decades. It is highly likely that the downward trend in nominal rates will persist in the near future. But these nominal rate cuts seem to have been accompanied by an at least equivalent expansion of the tax base, so that government revenues generated by the corporate income tax have actually increased overall. Belgium is following the international trend towards lower nominal rates and a wider tax base. The corporate income tax reform which took effect on 1 January 2003 aimed to eliminate the difference between the Belgian nominal rate and the EU-15 average. The most recent reform introduced the venture capital allowance from the 2007 tax year. This innovative measure reduces the discrimination between the tax treatment of equity capital and borrowings. The differential between the Belgian rate and the EU average has however since 2003 widened again to around 4 to 5 percentages points and will – in the absence of new measures – probably continue to increase in the near future. Finally, the article focuses on the European coordination of corporate income tax. The existence of twenty-seven different corporate income tax systems in the EU entails substantial cost for multinationals. At the same time, there is the fear that tax competition may erode the tax proceeds. Both the EC and a number of committees of experts have therefore published reports in the recent decades, proposing a high degree of corporate income tax harmonisation. So far, these initiatives have not succeeded. More specific initiatives, such as directives aiming to abolish tax distortions in the case of cross-border activities and measures to combat harmful competition have been more successful. The EC is now concentrating on achieving a common consolidated tax base for multinationals.corporate tax, tax competition, EU tax coordination

Trends in taxation of privately held assets

In most advanced countries, the budgetary rebalancing effort to be accomplished is considerable, with the result that new sources of finance are frequently being sought out. In Belgium, where levies on labour are already very high, there are those raising the possibility, in this context, of additional taxes on consumption or activities that cause pollution, as well as that of a rise in taxation on wealth and the income from wealth of private individuals. The article attempts to position Belgium’s existing levies on income from wealth and wealth itself in relation to those applying in the other countries of the EU. Whilst not claiming to be exhaustive in any way, it is intended to present the main characteristics and trends. It takes a look firstly at some statistical and methodological aspects of levies on wealth and the income from wealth. Then, the situation in Belgium is analysed. This analysis is followed by an international comparison, within the bounds of what is possible, of the scope and level of the various levies linked to the assets of private individuals. Lastly, a concise account is provided of advances with respect to cooperation on tax matters at the international level as well as the European directive on the taxation of savings. It is no simple matter to compare levies on the wealth of private individuals, owing to the complexity of the systems and the diversity of the components of wealth. Nevertheless, several general findings can be expressed. Compared to the average in the EU, levies on the wealth of private individuals and the income that they draw from it in relation to GDP are fairly substantial in Belgium overall. This is due in part to the relatively significant volume of assets held by private individuals in Belgium, but also to the rates of certain levies. It should be noted that in Belgium, the annual income from wealth is generally taxed moderately and levies on capital gains are virtually non-existent. On the other hand, wealth-related transactions such as the purchase of housing and the inheritance of estates are taxed relatively heavily. The actual rate of taxation is distributed very unfairly between the different forms of assets. Some are heavily subsidised, by way of tax deductions granted in the context of taxation of natural persons, such as pension savings, whilst some financial products, particularly those with short terms to maturity, are taxed quite heavily. At the international level, it is the case that levies on wealth in the strict sense have disappeared in most countries over the last twenty years. They have persisted in a number of countries and it is not impossible that the need to undertake budgetary consolidation will prompt others to reinstate them. In the last few years, an effort has been made to reduce international tax evasion, particularly tax evasion relating to income from wealth. In fact, the free circulation of capital and the lack of coordination between countries provided private individuals with the opportunity to evade tax on income from wealth. In order to combat tax evasion effectively, the OECD has been encouraging transparency and the exchange of tax information for about fifteen years. In 2009, under international pressure, numerous countries (including Belgium) took measures to comply with the OECD’s tax standards. At the EU level, the member states adopted a directive on the taxation of income from savings in 2003. Omissions in the current text, which has been in effect since 1 July 2005, provide private individuals with various opportunities to get round the directive. In 2008, the EC proposed some modifications to the directive in order to rectify these problems. Nevertheless, the new text has not yet been adopted by the Ecofin Council.

Public employment in Belgium

The article is intended to contribute to the debate on public employment in Belgium by analysing the most coherent possible set of statistics on its development and characteristics. According to the national accounts definition, the general government sector employed just over 800,000 workers in 2007. The sector’s main employers are the Communities and Regions and local authorities, while the federal government and social security together account for only one-fifth. If the concept used is broader than general government, and includes heavily subsidised jobs (health, social work and service vouchers), public enterprises and market intermunicipal associations, there could be 1.4 million persons in public employment. Over the long term, the variations in public employment correspond to the major fluctuations in budgetary policy. Employment in the general government sector expanded particularly strongly during the 1970s. Following a period of virtual stabilisation from 1982 onwards, employment in the sector increased again between 1997 and 2007. The analysis reveals that this expansion was not uniform across the branches of activity. During the recent period, employment has declined in defence and in some federal government departments, such as FPS Finance. Conversely, growth has been particularly marked in transport and in administration, especially where those services come under the local authorities or some federal departments such as justice. All sub-sectors have shared in the employment growth recorded since 1995. Local authorities account for over 60 p.c. of that growth, and the Communities and Regions almost 30 p.c., the remaining 10 p.c. being due to increased employment at federal level, including social security. A more detailed analysis therefore focused on developments in the administration branch of activity at the level of both the local authorities and the Communities and Regions. Among other things, this showed that local authority recruitment did not relate to civil service functions but concerned social work (crèches, the CPAS/OCMW re employment programmes, etc.), the police and cultural and sports positions. Regarding the characteristics of public employment, an ever diminishing proportion of staff has civil servant status, and women are increasingly in the majority. Moreover, the standard of skills of public sector personnel is constantly improving. A more detailed study of the age pyramids showed that, taking account of current retirement and pre-retirement patterns, departures should be staggered without reaching disproportionate levels in the next five to ten years. However, the numbers leaving are expected to be greater in some branches, departments and institutions.public employment, general government sector, Belgium

Strategies and measures aimed at consolidating public finances

The article outlines the current budgetary situation, explains why consolidation plans are urgently needed and provides an answer to the question as to what form those plans should preferably take. It also contains an insight into the strategies aimed at consolidating public finances. The financial crisis and the resultant economic recession have seriously undermined the health of public finances in almost all the developed economies. Budget deficits and public debt have risen sharply and these budgetary problems will not disappear automatically once the economy has fully recovered from the recession. On top of this, the budgetary impact of the ageing of the population could drive up budget deficits and cause public debt to rise even more quickly. To restore the sustainability of public finances, extensive consolidation efforts are required in a wide range of countries. Although a rapid and significant consolidation effort implemented simultaneously by a large group of countries could act as a brake on the economic recovery to some extent, a postponement of consolidation efforts, on the other hand, could shake the confidence of economic agents, give rise to financing risks and trigger a strong rise in interest rates. To remove doubts about the creditworthiness of countries, it is therefore advisable not to delay the announcement of concrete and credible austerity plans, even if the measures will only be implemented in the years to come. The timing and scope of consolidation efforts are dependent on country-specific circumstances. The scope of the consolidation efforts needed in most countries means that no limitations can be imposed with regard to the composition of consolidation plans. However, preference needs to be given to structural measures that reduce non-growth-promoting government expenditure or can dampen the increase in ageing-related expenditure. In spite of the already heavy burden of compulsory taxation in many countries, extra government revenues cannot be ruled out. Most countries have now begun preparing budgetary exit strategies. So there is some prospect of budgetary objectives that will herald a return to healthy public finances. In some countries, concrete austerity measures have already been worked out in the meantime. In other countries, plans of this type have yet to be detailed. However, firm government action is urgently required for this latter group of countries too, all the more so since postponing the necessary consolidation efforts would entail major risks.fiscal policy, budgetary consolidation, austerity plans, government debt

The economic recovery plans

Economic recovery plans make up a important part of the wide-ranging package of measures that economic policy-makers worldwide have taken in response to the financial and economic crisis. More specifically, the EU Member States have either approved or announced fiscal measures to boost economic growth amounting to a total of 1.1 p.c. of GDP in 2009 and 0.7 p.c. of GDP in 2010 for the EU as a whole. In the United States, the cumulative budgetary cost of the recovery measures over 2009 and 2010 should reach 5.4 p.c. of GDP. However, fiscal support for economic activity through the automatic stabilisers is greater in the EU than in the US. A comparison of policy responses, as regards both the scope and composition of the recovery plans, shows that there are significant divergences amongst the EU Member States themselves. Differences in terms of the extent of the recovery plans are in accordance with the European economic recovery plan’s call for account to be taken of differences in initial budgetary positions when drafting the national plans. Moreover, the European recovery plans consist of a wide range of measures, which, on the whole, are quite evenly distributed over the revenue and expenditure sides of the equation. The growth-supporting measures may be able to ease the recession in the short term, but the impact they will have is uncertain and possibly even fairly limited. An optimum effect of the recovery plans on economic growth in the short term would only really be reached if a number of preconditions are met first. So it is clear that the growth-stimulating measures need to be timely, temporary and targeted, conditions that are not always met. Furthermore, the effectiveness of the measures taken is to a large extent determined by the reactions from private economic agents. In this respect, an essential precondition is for there to be no doubt about the sustainability of government finances over the long run. However, combined with the already weak budget positions that some countries had to start with, the economic recovery plans and the effect that the recession has on the budget situation via the relatively large automatic stabilisers have seriously affected the state of public finances in many countries.fiscal stimulus, financial and economic crisis, EERP (European Economic Recovery Plan

Social security finances

One of the government’s main functions is to protect the population against a number of social risks. Hence, replacement incomes are provided in the event of unemployment, old age or occupational disability. Income supplements are granted to compensate in part for the financial burden associated with illness or with bringing up children. These social benefits are an important facet of the redistribution of income effected by the government. In Belgium, social protection is provided mainly by the social security sub-sector, which is the largest component of the general government sector. The level of government expenditure on social protection in Belgium is, expressed as a percentage of GDP, above the European Union average. This is due mainly to relatively higher expenditure on pensions and unemployment. The Belgian social security sector expanded strongly in the 1970s. In the ensuing period, total social security receipts and expenditure remained relatively stable on average; expressed as percentages of GDP, they stood in 2000 at roughly the same level as in 1980. During this period, however, there was a “stop and go” policy on expenditure and receipts : expansion periods were followed by periods in which a more restrictive policy was pursued. In recent years, social security has again been expanding, although only to a more limited extent. Over the years, the structure of social security spending has changed significantly : due to the strong rise in health care expenditure, this spending item has now become the most important component, just ahead of pensions. Since receipts and expenditure have hitherto moved very much in parallel, the financial balance of social security has always hovered around equilibrium. At present, the social security sector is not only free of any financial liabilities, it actually has substantial financial assets. Population ageing will clearly exert strong upward pressure on future expenditure on pensions and health care. This increase can be only partly offset by the predicted decline in unemployment expenditure and family allowances. Therefore, social security will have to face a major financial challenge in the (near) future.Belgian public finance, social security, social protection expenditure

Macroeconomic and fiscal impact of the risk capital allowance

The study, produced in response to a request made by the federal government, examines the economic impact of the risk capital allowance. More particularly, it assesses the extent to which the objectives of the law of 22 June 2005 introducing an allowance for risk capital in the Belgian corporation tax system have been achieved. The study gives a brief presentation of the measures introduced by this law. It analyses the influence of these measures on the financial structure of corporations, their effect on the Belgian coordination centres – whose beneficial tax regime will soon be abolished – and their macroeconomic impact particularly investment and employment. Their budgetary implications on the basis of both macroeconomic and microeconomic data is then examined.corporation tax in Belgium, tax allowance, risk capital, coordination centres

Interregional transfers and solidarity mechanisms via the government budget

The article examines transfers between regions via the central government budget, referring essentially to the regional household accounts published by the National Accounts Institute. It examines only the aspects concerning allocation between the regions of that part of government revenue and expenditure for which there is no direct counter-consideration. The Flemish Region is currently a net contributor to transfers between regions via the central government budget, whereas the Walloon Region is a net recipient. The Brussels Capital Region also makes a net contribution, though only a small one. These transfers between regions are due largely to variations in the contributions of each region to government revenues. In the case of households, the contribution of the Flemish Region exceeds that of the other two regions; for businesses, it is the Brussels Capital Region that makes the largest contribution. In addition, these transfers originate from the regional allocation of social benefits. Thus, unemployment benefits entail transfers from the Flemish Region to the Walloon Region and the Brussels Capital Region. In contrast, transfers between the regions via pensions currently favour the Flemish Region. In regard to health care expenditure, there are hardly any transfers between the regions at present. Projections also show the importance of both the expected demographic trends and labour market developments for the future pattern of transfers between regions. The influence of demographic trends is most favourable for the Brussels Capital Region and least favourable for the Flemish Region. This is likely to increase the net contribution from the former while the latter’s net contribution will decline, even if the current labour market divergences largely persist in the future. In contrast, in the event of full convergence of employment levels, the inter-regional transfers paid by the Flemish Region would actually disappear altogether, and the Brussels Capital Region would become the sole net contributor, though in that case the inter-regional transfers received by the Walloon Region would decline sharply. Finally, international comparison shows that transfers between regions are relatively small in Belgium, compared to what is seen in other EU Member States.regions, transfers, solidarity mechanisms