This Selected Issues Paper on Belgium provides an overview of the extent of trade and financial openness of Belgium and the links to particular countries. With an export-to-GDP ratio of 79 percent, Belgium belongs to the most open economies in Europe and also globally. Its exports are highly concentrated with a share of three-fourths of total merchandise exports accounted for by the European Union, of which close to two-thirds go to Germany, France, and the Netherlands.

Abstract

This Selected Issues Paper on Belgium provides an overview of the extent of trade and financial openness of Belgium and the links to particular countries. With an export-to-GDP ratio of 79 percent, Belgium belongs to the most open economies in Europe and also globally. Its exports are highly concentrated with a share of three-fourths of total merchandise exports accounted for by the European Union, of which close to two-thirds go to Germany, France, and the Netherlands.

II. ON A REVENUE-NEUTRAL GROWTH-ORIENTED TAX REFORM FOR BELGIUM1

A. Introduction

1. Belgium’s current economic situation has brought important fiscal policy questions to the forefront of the policy discussions. Among them, the question of designing tax policy to use it in its full capacity as a tool to preserve fiscal space while balancing the needs for economic growth in a complex environment deserves particular attention.

2. This paper delves into this issue with two main objectives. The first purpose is to provide an overview of the situation of the Belgian tax system, drawing on international comparisons to provide an assessment of its current stance. This will help understand which taxes may need to be revised at the time of deciding to improve the tax system. The paper then explores to what extent a shift in the tax composition may help boost employment and growth while leaving the overall tax-collection level broadly unchanged to preserve fiscal sustainability. In this regard, the paper draws on recent research that emphasizes the strong link that exists between the tax mix and different key economic variables. More specifically, the paper illustrates quantitatively the potential effects of a revenue-neutral change in the composition of taxes on different macroeconomic variables including per capita growth, employment and net exports.

3. The link between tax composition and economic growth has been extensively studied in the empirical literature, giving rise to a well-defined ‘tax and growth ranking’. In a nutshell, the most preferred taxes from an efficiency standpoint are those that least affect labor and investment-saving decisions.2 In this regard, it has been found that recurrent taxes on immovable property (and residential property in particular) are the least distortive tax instrument for growth, followed by consumption taxes (and other property taxes), personal income taxes, and corporate income taxes as the most harmful for growth.3 Therefore, a revenue neutral growth-oriented tax reform would involve shifting part of the revenue base from income taxes to consumption and immovable property taxes.

4. The rest of the paper is organized as follows. Section B summarizes the current situation of the Belgian tax system, emphasizing in particular how it compares with other countries in the region. Sections C and D then discuss in detail the specifics of the main direct and indirect taxes that are currently in place in Belgium. Section E then illustrates through a quantitative exercise to what extent a revenue-neutral set of tax policy measures may affect the Belgian economy. Finally, Section F concludes.

B. Overview of the Belgian Tax System

5. Belgium’s total tax revenue collection stands out as one of the highest among EU-15 countries.4 In fact, at 43.2 percent of GDP in 2009 it stood well above the EU-15 and the OECD averages of 38.4 and 33.8 percent, respectively (Figure II.1). Likewise, other comparator countries such as France, Germany and the Netherlands, which also have high levels of taxation, have been systematically below Belgium’s tax collection levels in recent years.5 This reflects Belgium’s social preferences to maintain a large and active state that provides public goods and social transfers, as is also the case in many other European countries. However, regardless of the overall tax burden and the objectives pursued through this by the country, the question of whether the structure of taxes is ‘adequate’ to also satisfy key goals such as employment and growth remains open and becomes particularly important in the current context.

6. Belgium’s tax structure heavily relies on taxes on income, profits and capital gains, with collection levels notably above EU-15 and OECD averages. Belgium’s high reliance on these taxes becomes even more striking when comparing them with the cases of France, Germany and the Netherlands, countries which are currently levying between 6 and 4 percent of GDP less than Belgium in corporate and non-corporate income taxes. Although payroll taxes and social security contributions are more aligned with the levels observed in the three neighboring countries, the overall collection from these taxes still remains about 3 percent and 5 percent of GDP above EU-15 and OECD averages, respectively. These characteristics of the Belgian tax system highlight the significant tax burden that currently exists on labor and business. Interestingly, the collection of taxes on goods and services, and property taxes does not seem to be out of line in Belgium relative to other economies in the region.

Figure II.1.
Figure II.1.

Selected Countries: Overall Tax Collection in 2009

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Sources: OECD, Revenue Statistics Database.

7. The Belgian bias toward direct taxation is significant, and it has shown little change over the last 15 years.6 As of end-2009 direct taxes in Belgium—excluding social security contributions—reached 16 percent of GDP, a ratio notably above European averages, which stood at 11.5 and 14.2 percent of GDP for the EU-27 and EU-15 countries, respectively. However, indirect taxation in Belgium remained broadly in line with European averages, showing very small changes over the course of the last decade. Although the high relevance of direct taxation is a common phenomenon among advanced economies, the relatively larger preponderance observed in Belgium is remarkable. In fact, according to the latest European Commission (2011) statistical release, as of end-2009 the direct-to-indirect tax ratio in Belgium of 1.2 stood at the high end of the EU-15 countries, and significantly above that of France (0.7), Germany (0.9), and the Netherlands (1).

uA02fig01

Belgium: Direct and Indirect Taxes 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: European Commission, Taxation Trends in the European Union.1/ Excludes Social Security Contributions.

8. A major aspect of the choice of the tax structure is related to its potential impact on the economy through different channels, including employment, growth, income distribution and FDI inflows. In fact, according to different endogenous-growth models, the effects of the tax system on the economy can be highly persistent, owing to the link that exists between tax composition and the accumulation of human and physical capital.7 Additionally, the tax composition can affect the income distribution, as certain types of taxes tend to be more progressive than others.8 Moreover, the amount of FDI received by a country can also be affected by the tax structure, due to the high degree of economic and financial integration that exist among many economies. Are these effects substantial? In an empirical work considering a panel of 116 countries over the period 1972-2005, Martinez-Vazquez et al (2010) find that a 10 percentage points increase in the direct-to-indirect tax ratio may reduce the GDP per capita growth rate by 0.39 percent, a finding that reflects the potentially-significant relevance of the tax mix on the evolution of the economy.9

9. Several reforms, and notably those initiated in the early 2000s, have attempted to moderate the bias of the Belgian tax system towards direct taxation but have yielded mixed results (Box 1). Notwithstanding the authorities’ initial objectives, the overall effects of these reforms have been relatively modest in terms of producing an effective reduction in the weight of direct taxation and a cutback in labor taxes. In fact, the direct-to-indirect tax ratio decreased moderately from 1.35 in 2001 to 1.23 in 2009. Likewise, the average labor tax wedge decreased only marginally, from 56.6 percent in 2001 to 55.4 in 2010 for a single worker without children at the average wage. In addition, the reduction in the average personal income tax rates introduced with the tax reform, which was especially targeted to low-earning workers, gave rise to pronounced spikes in marginal labor taxes. This has likely affected the supply of hours in the labor market in a negative way, with a concomitant adverse effect on employment and growth.

The Tax Reform of the Early 2000s

In the early 2000s, Belgium implemented a series of measures to reform its tax system, most notably in 2002, to offset the high reliance on direct taxation through reductions in personal income taxes, social security contributions and corporate income taxes. With these measures the authorities aimed at fostering employment and growth through reductions in labor costs, with an estimated loss in revenues of about 1.3 percent of GDP. Key measures included:1

  • A tax credit for low income earners;

  • The streamlining of marginal tax rates on medium income tax brackets;

  • The introduction of new work-related tax-deductible expenses;

  • A reduction of the top marginal personal income tax rate from 52 percent to 50 percent;

  • The introduction of higher tax exemptions on the income of married double-income earning couples, alongside the tax exemptions of unmarried cohabitant couples;

  • The separation of non-work related income taxation;

  • The promotion of environmentally-friendly taxation; and

  • The increase in the tax allowances for dependent children.

uA02fig02

Belgium: Structure of Tax Revenues in 2000 and 2009

(Percent of total tax revenues)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: OECD, Revenue Statistics Database.

As a consequence of this reform, and most notably after the introduction of the notional interest rate deduction in 2006, the share of the corporate income tax (CIT) in total tax revenue decreased significantly between 2000 and 2009 from 7.2 percent to 5.9 percent. This trend is also observed in the case of the personal income tax (PIT), which went from 31.3 percent of total taxes to 28 percent over the last decade. However, the share of VAT revenues and excises in total collection—a key determinant of total indirect taxes—decreased slightly in the comparison between the two periods, a result that unveils the introduction of several exemptions and reduced rates that negatively affected the performance of these taxes during the last decade. There has been also an upward shift in the participation of property taxes, reflecting a number of measures that boosted their collection. Some increase has taken place regarding the share of social security contributions in total taxation, a source of revenues which still accounts for about one third of total collection.

1 See Abreu (2004) and Høj (2009) for details.

10. Moving forward, additional constraints should be taken into account when designing measures to reduce the high tax burden on labor in an enduring way. A key challenge now is the fact that the fiscal space to reduce taxes is rather limited, as a consequence of the fiscal consolidation needs faced by the country. For this reason, any future reform should consider not only reductions in direct taxation but also additional measures that compensate for the loss in revenues associated with lower labor and corporate taxes, for instance through the use of more growth-friendly tax instruments such as consumption, property and environmental taxes.

C. Labor and Business Taxation

Personal income tax, social security contributions and the tax wedge

11. Although the top statutory PIT rate in Belgium has substantially decreased after the early 2000s, it still remains at the high end of the EU-15. In fact, in 2009 it reached 53.7 percent of the average wage for a single individual worker without children, roughly 10 percentage points below that of 2000 (63.9 percent). Despite this reduction, Belgium’s still high statutory rate is reflected in the fact that PIT contributions as a share of the average wage is currently the highest among EU-15 countries. Nevertheless, the overall yield on this tax has been more aligned with the levels observed in other advanced economies. This is a direct consequence of widespread deductions and exemptions, which have severely undermined the overall PIT tax base in Belgium.10

uA02fig03

OECD Countries: Personal Income Tax

(Percent of gross wage earnings)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: OECD, Taxing Wages Database.1/ For a single individual worker without children, at the income level of the average worker.

12. The high social security contributions (SSCs) have also contributed to the fact that labor costs are about the highest in the EU-15. Although the fraction of SSCs covered by employees has not been far from other EU-15 countries in recent years, the fraction covered by the employer has notably been above EU-15 or OECD levels, and is surpassed only by France among the three big neighboring countries. For this reason, the overall SSCs as a fraction of the average wage in Belgium remained well above the EU-15 average in 2010—yet showing a slight downward trend since the beginning of the decade.

uA02fig04

Belgium: Marginal Tax Wedge 1/

(Percent)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: OECD, Taxing Wages Database.1/ AW = Full-time job average wage in the private sector.
uA02fig05

OECD Countries: Social Security Contributions and Total Tax Wedge in 2010

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: OECD, Taxing Wages Database.1/ For a single individual worker without children, at the income level of the average worker.

13. As a consequence of the high PIT and SSCs, the labor tax wedge in Belgium in 2010 was the highest in the OECD for an average worker. More striking is the fact that for a single worker at average earnings it stood roughly 6 percentage points above France and Germany, the two countries that immediately follow Belgium in this ranking. Moreover, despite the reductions in the statutory PIT rates observed in the last 10 years, there has been almost no modification in the level of the tax wedge relative to where it was a decade ago. This highlights the pressing need for more sweeping measures to reduce the high tax burden on labor that currently exists in the country. In fact, the average tax wedge has either been the highest or the second highest in the OECD considering all the different types of the labor wage earnings described in the OECD taxing wages database for the year 2010. A similar pattern has been observed in the case of the marginal tax wedge, as it has been systematically at the top of the OECD over the last decade. The combination of a high average and marginal labor tax wedge has discouraged employment through its negative impact on the decision to work (extensive margin) and the number of hours offered in the market (intensive margin), thus hampering long-run growth.

OECD countries: Average Labor Tax Wedge in 2010 1/

AW = Average Worker: average wage in a manual and non-manual full-time job in the private sector for all workers. Source: OECD, taxing wages database.

Corporate income tax

14. Although the statutory CIT rate in Belgium was reduced in the 2002 tax reform, it still remains high by regional standards. It stood at 34 percent in 2011, down from 40.2 percent in 2000, a figure about 7.5 percentage points above the EU-15 average. Moreover, the Belgian’s CIT rate is currently significantly above that of Germany (30.2 percent) and the Netherlands (25 percent). Notwithstanding the high CIT statutory rate, the yield on this tax has been aligned with other EU-15 countries—with a total collection in Belgium of 2.5 percentage of GDP as of 2009, roughly 0.2 percent of GDP above the EU-15 average. Different tax benefits and exemptions explain the relatively low yield of the CIT, including:

  • The notional interest deduction. This allowance permits companies to deduct from their tax base a notional amount of interest based on the 10-year government bond yield before the current tax year.11 The total amount that can be deducted also includes a cap, which is established by law. The notional interest rate deduction has been successful in reducing the bias towards debt financing, owing to the deduction of the interest payments on debt. In that sense, Belgium’s tax regime allows for a more evenly-distributed funding source between equity and debt across firms relative to other comparator OECD countries, thus helping improve the allocation of investment projects more efficiently with its concomitant positive effects on employment and growth.12

  • Several investment projects benefit from additional tax credits, notably in the area of research and development. In addition, a special tax regime applies to SMEs regarding investment deductions. However, as highlighted in Høj (2009), the presence of lower rates and special deductions for SMEs may lead to other specific distortions, as these firms may avoid increasing their size to the optimal level for tax reasons, thus affecting employment and growth.

uA02fig06

Selected Countries: Corporate Income Tax (CIT)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Sources: OECD Tax Database, Corporate and Capital Income Taxes; and OECD, Revenue Statistics Database.1/ basic combined central and sub-central (statutory) corporate income tax rate given by the adjusted central government rate plus the sub-central rate.

D. Brief Overview of Other Key Taxes in Belgium

VAT

15. The standard VAT rate in Belgium at 21 percent is high by European standards, and above that of Germany (19 percent), France (19.6 percent) and the Netherlands (19 percent). However, the total VAT collection at 7 percent of GDP is somewhat below the EU-15 average of 7.3 percent, and below the levels of Germany (7.1 percent) and the Netherlands (7.2 percent), but is broadly in line with that of France (7 percent). In addition, the VAT revenue ratio-defined as total VAT revenue relative to its potential base—stood at 0.49 by end-2008, a ratio similar to that of France but notably below the EU-15 average (0.55), Germany (0.55) and the Netherlands (0.60). Widespread exemptions and reduced rates in Belgium mostly explain the reduced VAT base and its relatively lower yield.

uA02fig07

Selected OECD Countries: VAT Trends

(Percent)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: OECD, 2010, Consumption Tax Trends.

16. Besides the standard 21 percent rate, three other rates currently coexist in the country. There is a 6 percent rate applying to public housing, refurbishment of old housing, food, water, pharmaceuticals, animals, art and publications and some labor intensive services. There is also an intermediate 12 percent rate applying to a limited number of transactions and food in restaurants and catering services. Finally, there is a zero rate on newspapers and certain weeklies. It follows from the relatively lower yield on the VAT that a full revision of its structure, including the elimination of exemptions and reduced rates could be considered, notably through the equalization of all rates with the statutory rate. The underlying social objectives of a differentiated VAT rate structure may be instead pursued through other fiscal instruments such as well-targeted transfers.

Property taxes

17. Property taxes have efficiency-enhancing characteristics relative to other tax instruments, which essentially stem from the immobility of its tax base. They are also less distortive than other taxes in terms of the allocation of resources in the economy, since they do not tend to affect investment-savings decisions, thereby helping preserve long-run growth. They also have important properties in terms of tax progressivity, since property values and income tend to be positively correlated.

18. Although Belgium levied 2.9 percent of GDP in property taxes in 2009, a figure similar to that of other key EU-15 economies, the breakdown of these taxes differed substantially from other countries in the region. In particular, property taxes in Belgium rely substantially on taxes on financial and capital transactions, which currently yield taxation levels significantly above the EU-15 average. Similarly, estate and inheritance taxes are at the high end of the EU-15, and notably above that of France, Germany and the Netherlands. Although immovable property taxes at 1.2 percent of GDP are more aligned with the OECD average, the yield on these taxes is notably below the level observed in France (2.4 percent of GDP) and other major OECD countries such as the United Kingdom (3.5 percent of GDP) and the United States (3.1 percent of GDP). Outdated property values explain to a large extent the relatively lower performance of immovable property taxes (see Høj, 2009).

OECD Countries: Structure of Property Taxes in 2009

(in percent of GDP)

Source: OECD, Revenue Statistics Database.
Environmental taxes

19. Environmental taxes represent an important source of tax collection that can be further exploited in the country. In 2009, Belgium collected 2 percent of GDP in environmental taxes, a figure notably below broad EU averages. In addition, the comparison with the Netherlands becomes particularly striking in this regard, since that country currently levies twice as much as Belgium in environmental taxes. The higher tax collection of energy, transport and pollution taxes in the Netherlands vis-à-vis Belgium largely explains the observed cross-country differences. More generally, there seems to be space to increase energy and fuel taxes in Belgium, which currently stand out as being particularly low by EU-15 standards.

uA02fig08

Selected Countries: Environmental Taxes in 2009

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 056; 10.5089/9781475502398.002.A002

Source: European Comission, Taxation Trends in the European Union.
Tax expenditures

20. Tax expenditures may impose important costs to society, thus calling for a careful examination. Although countries generally rely on tax expenditures to promote investment projects (e.g., R8D), the consumption of certain goods (e.g., charitable gifts) or to increase tax progressivity (e.g., reduced food VAT rates), which could support important policy objectives, they are also subject to substantial drawbacks. Among them stands out their poor transparency and accountability, and the fact that they generally tend to be poorly targeted while adding significant complexities to the tax system (IMF, 2011a; OECD, 2010b). Moreover, due to the associated loss in tax collection additional pressures in other taxes arise to compensate for the foregone revenues associated with tax expenditures.

21. Belgium’s tax expenditures are widespread and currently represent about 2.9 percent of GDP.13 By regional standards these levels appear to be at the high end of the spectrum, as they are above the levels observed in France (2.2 percent of GDP), Germany (1 percent of GDP) and the Netherlands (1.8 percent of GDP) for similar years. Although it is difficult to set an adequate target for them from a normative viewpoint, a reduction of tax expenditures to a level similar to that of Germany appears to be desirable to gain fiscal space.14

E. A Possible Scenario for a Revenue-Neutral Tax Reform in Belgium

22. This section discusses a set of measures that could be implemented in Belgium to reform the tax system in a revenue-neutral manner to help boost employment and growth. There are two main pillars in the proposed reform: (i) it will be revenue neutral, in the sense that the overall tax pressure will broadly remain at the current level, and therefore the current fiscal stance will be essentially unaffected; and (ii) it will involve a change in the tax composition, given by a reduction in labor taxes fully compensated by an increase in taxes that have a less harmful effect on economic activity. Specifically, consumption and property taxes, which generally have lower negative effects on growth, could be raised vis-à-vis labor taxes. Environmental taxes could also be increased to gain further fiscal space, since they have desirable effects in terms of the allocation of resources in the economy. In addition, net exports will tend to increase through the rise in the domestic price of imports vis-à-vis exports, essentially through a fiscal devaluation mechanism.15

23. Belgium could raise the yield on a number of key taxes to provide around 3.8 percent of GDP in additional revenues. Simple indicative calculations suggest that these extra revenues can be obtained as follows (Table 1):.16

  • An increase in VAT efficiency: increasing the VAT revenue ratio from 0.49 to the OECD average of 0.58 through the elimination of reduced rates and exemptions would bring about 1.3 percent of GDP in additional revenues.

  • An increase in environmental taxes: the willingness to preserve the environment of the Belgian society suggests that these taxes can likely be between the EU-15 and the Netherlands levels—2.6 and 4 percent of GDP, respectively—essentially through increases in fuel and energy taxes.

  • An increase in immovable property tax collection: although it is difficult to evaluate the potential collection of this tax due to data availability, using as a benchmark the average of the best 20 OECD performers—1.6 percent of GDP—it appears that Belgium could be able to obtain additional revenues in the order of 0.4 percent of GDP through a reassessment of property values. This in turn will help reduce the gap with other key OECD countries such as France, the United Kingdom and the United States, which as of end-2009 are collecting on average 3 percent of GDP regarding these taxes.

  • A reduction of tax expenditures: a careful elimination of those tax expenditures associated with the personal and corporate income taxes which are not necessarily well targeted, could further expand the tax base to yield 1 percent of GDP in additional revenue to reach levels closer to those observed in Germany.

24. The additional revenue should be used to reduce the labor tax wage. According to a number of illustrative estimations, the tax wedge could be reduced up to 10 percentage points to reach a level closer to that of the EU-15 without affecting the overall fiscal stance. To ensure that labor demand is boosted more effectively, the reduction in the tax wedge should target a cutback in employers’ social security contributions. In terms of the potential revenue losses, a tax wedge reduction of 6 percentage points would imply a loss of about 2.3 percent of GDP, whereas a more aggressive reduction of 10 percentage points would entail a revenue loss of roughly 3.8 percent of GDP. Accordingly, the direct-to-indirect tax ratio will be endogenously affected, falling from 2.34 to either 1.94 or 1.84 depending on the extent of the tax wedge reduction.17

Table II.1.

Illustrative Quantification of Proposed Tax Measures

(Percent of GDP)

Labor wedge measure as a percent of total labor costs.

Includes social security contributions.

Source: IMF staff calculations.

25. Estimations suggest that the impact on unemployment, per capita growth, and net exports can be significant. Abstracting from second-round effects, a partial equilibrium assessment of the long-run impact of such measures provides the following results:

  • Drawing on standard estimations of elasticities for OECD countries, the reduction in the tax wedge could lead to a reduction in unemployment of up to 2.8 percentage points over the medium term depending on the extent of the tax wedge reduction.18

  • Estimations for the elasticity of output growth to the tax mix taking into account the uncertainties existing in such estimations suggest that GDP per capita growth can be boosted in the range of 0.5 to 1.2 percent over the long run, with mid-point estimates in the order of 0.8 percent.19

  • The implicit reduction in the domestic price of exports vis-à-vis imports, associated with the lower tax wedge and the concomitant increase in the VAT burden, suggests that net exports could be increased up to 3.9 percent over the long run through the so-called fiscal devaluation mechanism.20

Table II.2.

Illustration of Long-run Effects of Proposed Measures on Key Macroeconomic Variables1/

(Percentage points)

Scenario (i): Reduction in the tax wedge by 6 ppts. Scenario (ii): Reduction in the tax wedge by 8 ppts.

Source: IMF staff calculations.

F. Concluding Remarks

26. Labor taxation in Belgium is currently about the highest in the OECD, thus suggesting the need for a sweeping reduction in labor taxes as a key mechanism to boost employment and growth. A main challenge for Belgium under the current circumstances is, however, the fact that the fiscal space to reduce taxes is rather limited, owing to the fiscal consolidation needs faced by the country. For this reason, any reduction in labor taxes should be accompanied by a concomitant increase in those taxes that are less harmful for growth in order to preserve fiscal sustainability over the medium term. In this regard, the paper has laid out a proposal for a tax reform which consists of a significant reduction in employers’ social security contributions, financed through an increase in the VAT tax base, an increase in environmental and immovable property taxes and a targeted elimination of tax expenditures. Simple back-of-the-envelope calculations suggest that such a reform could entail significant gains in terms of employment and growth over the medium term, without affecting the fiscal stance of the country. Moving forward, it remains to be determined in more detail what the quantitative effects of these measures can be and how to engineer such a reform considering the political constraints faced by the country.

References

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1

Prepared by Santiago Acosta-Ormaechea.

2

A relevant caveat arises with those taxes whose objective is to modify the behavior of economic agents owing to the negative externalities that can be associated with certain activities undertaken by them. Environmental taxes are a clear example. In those cases the distortions induced by these taxes are desirable and in fact are the objective of the introduction of the tax policy measure.

3

See, for instance, Arnold et al (2011).

4

Following the classification of the OECD Revenue Statistics database the total tax revenue category includes social security contributions.

5

In 2009 total revenue collection in France, Germany and the Netherlands reached 42.4 percent, 37.3 percent, and 38.2 percent of GDP, respectively.

6

The definition of direct and indirect taxes follows that of the European Commission (2011). Direct taxes include the personal income tax, the corporate income tax and taxes on capital gains. Indirect taxes include the value-added tax, excise duties and consumption taxes, other taxes on products (including import duties) and other taxes on production.

7

See Martinez-Vazquez et al (2010) for a discussion.

8

For instance, property taxes, and in particular immovable property taxes, may have well-regarded effects in terms of favoring a more equal income distribution as they tend to impose a higher burden on the relatively better-off fraction of the population.

9

The change in the tax mix also reduces FDI inflows (by 0.57 percent) and reduces income inequality by about 1 percent—due to data availability, different countries and sub samples are considered in these two estimations (see Martinez-Vazquez et al, 2010).

10

Other factors such as tax evasion and fraud may also play a role in undermining the overall tax base in Belgium, notably in the cases of the PIT and VAT.

11

For the assessment years 2011 and 2012, the rates are set at 3.8 percent and 3.4 percent, respectively. For SMEs these rates are increased to 4.3 percent and 3.9 percent.

12

See de Mooij (2011) for a summary of the potential quantitative effects of the interest rate deductibility on key macroeconomic variables, including employment and growth.

13

The breakdown of tax expenditures is roughly given by: PIT (1.7 percent of GDP), CIT (0.8 percent of GDP) and VAT (0.4 percent of GDP). See OECD (2010b) for details.

14

Tax expenditures on PIT in Belgium at 1.7 percent of GDP are significantly above the levels observed in France (0.8 percent of GDP), Germany (0.6 percent of GDP) and the Netherlands (1 percent of GDP). These large tax expenditures are essentially associated with the exemptions and reduced rates for social benefits and pensions (see OECD, 2010b).

15

See IMF (2011b) for details.

16

This exercise provides a number of back-of-the envelope calculations that are useful to evaluate the potential gains of the different tax-policy measures, and as such they are meant to be only indicative. For simplicity, second-round effects have been ignored. For further research it could be desirable to undertake a more detailed estimation of the potential effects of these measures.

17

For this assessment of the direct-to-indirect tax ratio the composition of direct and indirect are slightly redefined in order to align this ratio to that considered in the estimations of Martinez-Vazquez et al (2010). Specifically, using the classification of the Revenue Statistics database of the OECD direct taxes are defined as the sum of: taxes on income, profits and capital gains; social security contributions; taxes on payroll and workforce; and taxes on property. Indirect taxes are defined as the sum of: taxes on goods and services; and other taxes.

18

See Bassanini and Duval (2006) for details on the estimations for OECD countries. Results from the paper indicate that a 10 percentage points reduction in the tax wage can reduce unemployment in an average OECD country by about 2.8 percent.

19

For panel data estimations of these elasticities see Arnold et al (2011) and Martinez-Vazquez et al (2010).

20

See IMF (2011b) for details of these estimations. The analysis considered there suggests that a revenue shift of one point of GDP from employer’s social security contributions to VAT could lead to an increase in net exports of 0.443 (= 2.242 - 1.799) points of GDP for an average Euro-area country. It is worth mentioning that this result strongly depends on the assumption that nominal wages are fixed in the short run, an assumption that is followed here for convenience.

Belgium: Selected Issues Paper
Author: International Monetary Fund