Structure of public revenues

Kris Van Cauter, Thomas Stragier, Isabelle Brumagne, Luc Van Meensel and Johan Claeys
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Kris Van Cauter: National Bank of Belgium, Research Department
Thomas Stragier: National Bank of Belgium, Research Department
Isabelle Brumagne: National Bank of Belgium, Research Department
Luc Van Meensel: National Bank of Belgium, Research Department
Johan Claeys: National Bank of Belgium, Research Department

Economic Review, 2004, issue ii, 47-59

Abstract: Leaving aside issues concerning the optimum size of the public sector and the optimum scale of public revenues, an important issue is to determine which is the public revenue structure that is the most favorable to growth. It is important to distribute the burden of fiscal and parafiscal levies as evenly as possible over the various tax bases, to minimise the disincentive to activate the available factors of production, and to coordinate or harmonise the tax system at international level to ensure that, for certain forms of taxation such as the tax on savings, the desirable level of taxation cannot be prejudiced by the risk of relocation. In Belgium, the burden of fiscal and parafiscal levies is relatively concentrated on labour, since – on the basis of the national accounts – the burden on that factor was over 6.8 percentage points higher than the EU average in 2001, while the rates of tax on consumption, corporate profits and capital were much closer to the European average. The difference between Belgium and the EU in terms of the marginal rates of fiscal and parafiscal levies on labour is actually considerably greater than the difference in the average tax burden recorded on the basis of the annual accounts. Part of the reason could be that the scale of tax expenditure is more favourable to taxpayers in Belgium is higher than elsewhere. Since the level of the marginal rates probably plays a key role in economic growth, it is questionable whether this is the ideal structure for the taxation of labour incomes. In 2001, the implicit rate of VAT was 1.4 percentage points above the EU average. Conversely, the implicit rate of the other consumption taxes is below the average. That is due to the level of those taxes on tobacco, alcohol, the purchase of private motor vehicles and mineral oils, particularly heating oil. In Belgium, the reductions in personal income tax and social security contributions already implemented or scheduled have reduced the levies on labour incomes in recent years, and that reduction will continue in the future. Conversely, certain indirect taxes have increased and further rises are planned for the years ahead. Following the entry into force of these measures, the burden of fiscal and parafiscal levies will diminish, and shift slightly towards consumption, correcting to some extent the heavy concentration of this burden on labour. This will bring the structure of taxation closer to that of the EU. Since it was cut in 2003, the nominal rate of tax on corporate profits has been slightly below the EU average in Belgium. The scale of tax expenditure for ordinary companies seems comparable to that observed elsewhere. Moreover, it seems that tax incentives for research and development – vital factors determining the economy’s growth potential – are relatively modest in Belgium.

Date: 2004
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