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Prepared by Santiago Acosta-Ormaechea.
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.
Following the classification of the OECD Revenue Statistics database the total tax revenue category includes social security contributions.
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.
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.
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.
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).
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.
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.
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.
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.
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).
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.
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.
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.
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.