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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of Belgium published on 8 July 2009.
The tax system is relying too much on growth distorting taxes
The tax system was reformed in the 2000s with the aim of enhancing growth through lowering of labour and corporate taxation. Nevertheless, considerable scope remains to make the tax system more conducive to growth. As the tax burden is among the highest in the OECD, reforms need to be self-financed unless accompanied by spending cuts. In terms of structure, the tax system relies too heavily on relatively distorting taxes, such as those on labour and business, and too little on less distorting taxes, such as those on consumption and immovable property. Thus, to promote growth, a tax reform should aim at shifting the tax burden from labour and business to consumption and immovable property.
Overall tax revenues as a share of GDP
1. Or latest available.
2. Including taxes on goods and services and property.
Source: OECD, Revenue Statistics database.
Despite reform, labour taxation continues to contribute to substantial labour market traps
Although reforms in the 2000s aimed at reducing taxation of labour, average and marginal rates remain high, which depress both participation and hours worked. In particular, the way spouses’ income is taxed leads to high marginal tax rates for second earners with relatively low incomes, distorting their labour supply incentives. The first step in reforming personal income taxation should be to complete the tax separation of spouses. Moreover, the personal tax system is characterised by a large number of tax expenditures, structural reliefs and taxable income brackets. The tax exemptions and reliefs are often regressive and they substantially shrink tax bases. The second step in reforming the personal income tax system should be to drastically reduce exemptions and structural relief so as to broaden the tax base to allow a lowering of marginal tax rates. Reforms have also been implemented to reduce employers’ social security contributions and introduce wage subsidies to promote employment prospects for low-skilled, younger, older, R&D and shift-and-night workers as well as for long-term unemployed. The wide scope of these measures has led to a complex, costly and poorly targeted system, which at times has conflicting objectives as some of the targeted groups compete for the same jobs. The cuts in social security contributions will be refocused on low wage workers from 2010 onwards. To enhance the structural effectiveness of wage subsidies in terms of employment and participation, they should be targeted at low-wage workers. During the crisis, a special attention should be given to the low-skilled youth who are at a greater risk of dropping out of the labour market. The interaction between the personal income tax, the social security, and the benefit systems has created numerous labour market traps, creating barriers to the labour market inclusion of low-wage workers. To address the remaining labour market traps, spikes in the effective marginal tax rates should be removed.
Marginal tax rates by taxable income
1. Legal minimum wage in 2008 equals EUR 16 657 and annual average earnings EUR 38 681.
Source: OECD, Taxing Wages database.
Corporate tax rates are relatively high
During the 2000s, the corporate tax system was reformed to make it more neutral with respect to various financing forms by making debt financing less attractive. Nevertheless, in comparison with other countries, the corporate tax rate remains relatively high, which lowers the after-tax rate of return on investments, thereby reducing the attractiveness of investing and growth. Thus, corporate tax rates should be cut to levels comparable to other European countries. Moreover, the gap between the nominal and the effective rates remains relatively large as a result of reduced rates for SMEs and tax deductions for investments, particularly in R&D. The former has little effect on tax revenues as SMEs often do not have high profits, but the system of reduced rates creates a risk that small firms do not grow to their optimal level, thereby not maximally contributing to overall productivity and employment growth. Thus, the nominal tax rate should be reduced by broadening the tax base through a removal of exemptions and unnecessary tax deductions. Furthermore, the system is still not fully neutral among various forms of financing because the risk capital allowance is based on the risk free long-term government rate and thus below the actual market rate. In addition, double taxation of dividends through the personal income and the corporate tax system is still an issue. Thus, the risk capital allowance should be based on actual market rates.
Taxation of saving vehicles varies widely without clear social benefits
The tax treatment of savings differs across vehicles. The most tax favoured saving vehicles are owner-occupied housing, second and third pillar pension investments, and tax favoured savings accounts (effectively similar to demand deposits). Although this structure aims at stimulating private savings, at a substantial fiscal cost, it does not appear to stimulate overall savings. Rather, it affects the allocation of savings, away from those with higher pre-tax returns, distorting capital allocation and thus hindering growth. The principal reason for the favourable treatment of owner-occupied housing is the below market value assessment of properties used for computing the tax on imputed rents. A first step to remove the tax favouring of owner-occupied housing would be to base assessments on current market values. However, that would still leave Belgium with a smaller reliance on immobile tax revenues than other countries. The tax rate on imputed rent should also be increased. On the other hand, the taxes on buying and selling owner-occupied houses should be reduced to enhance labour market mobility. Subsequently, tax neutrality among savings vehicles should be improved by aligning the taxation of other savings vehicles with that of owner-occupied housing, which implies the removal of exemptions and the introduction of similar rates as well as of capital gains taxation across relevant savings vehicles. An important development in this respect is that Belgium has endorsed the OECD standard for the exchange of information in tax matters and is now actively engaged in implementing the standard. Once implemented, the standard will enable Belgian tax authorities to respond to requests for information, including banking information, from other tax authorities for all tax purposes. Belgium has already finalised discussions with a number of countries to change the relevant treaties. Belgium is also engaged in a process to implement the OECD standards in this area with respect to other countries and has sent more than 80 draft protocols to other treaty partners with a view to updating the existing treaties.
Taxation of consumption should be increased to reduce distortion in the tax system and to pursue environmental objectives
From a growth perspective, taxes on consumption are among the least distortive taxes. In some respects, the Belgian system does place a considerable importance on consumption taxes. For example, the VAT rate is higher than in neighbouring countries. However, the effective VAT rate is lower because of the relatively widespread use of reduced rates to pursue social objectives, even though such measures are poorly targeted and the associated social objectives could be more effectively reached through targeted social transfers. The consumption tax base should be broadened by abolishing all reduced rates and exemptions. Such a measure could generate additional revenues of about 2% of GDP, although the net revenue gain would be smaller as some of the additional resources would be needed to finance targeted social transfers. Such a measure should be implemented carefully to avoid second round inflationary effects arising from existing wage indexation arrangements. A greater reliance on environmentally motivated taxes would have similar benefits as consumption taxes. Belgium relies less on such taxes than other OECD countries, which can be largely explained by low excise duties on fuels, particularly for diesel. The government has introduced a “ratchet” tax (le mécanisme du cliquet) on transport fuels, where a fall in oil prices is partly offset by an increase in excise taxes. Higher taxation of fuels will support environmental objectives and increase the tax system’s reliance on less distortive consumption taxes. The government should introduce a more environmentally friendly taxation of fuels that is based on their emissions of CO2 and other pollutants, implying a relatively higher taxation of diesel, and the excise taxes should be increased to internationally comparable levels.
How to obtain this publication
The complete edition of the Economic Survey of Belgium is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Belgium Desk at the OECD Economics Department at firstname.lastname@example.org.
The OECD Secretariat's report was prepared by Jens Hoj and Tomasz Kozluk under the supervision of Pierre Beynet. Research assistance was provided by Sylvie Foucher.