Taxation and trend growth :
what can be done in Belgium ?
Etienne de Callataÿ
Université de Namur et UCL
CEBLF
November 26, 2015
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Structure
Taxation and long-term growth
• General considerations
• What to do in Belgium
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General considerations
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Why to worry about growth ?
• Less growth, more happiness ?
• Secular stagnation (Hansen / Summers)
• Lower trend growth
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Demographics
Risk aversion related to ageing
Less gain from skills’ upgrade
Less fiscal profligacy
Less financial leverage
Environmental constraints
…
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How to stimulate sustainable growth ?
• Culture
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More cooperation, more mutualization
Confidence
Entrepreneurship
European integration
(./..)
• Structural reforms
– Labor markets
– Goods & Services market
– Efficiency of the authority
• Public expenses
• Regulation
• Taxation
– (./..)
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The ideology of structural reforms
• Perception that growth concerns & structural reforms = ultra-liberalism
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Flexibility of wages and of labor contracts
Products market deregulation
No eye for inequality
(./..)
• Reassessment of various policy recommendations
– Rigidities have also virtues (labor market, housing prices, …)
• Broader perspective on structural reforms
– Ex.: low effective retirement age related to
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Correlation between age and wage
Limited net of tax income gap
Access to private pension capital
Hardship of traffic congestion
link with automatic wage indexation
link with tax privilege for retirees
link with set-up & taxation of private pension schemes
link with public transportation & company cars
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Here, focus on Belgium
• Belgium, a small open, integrated economy
• Growth at home ≈ growth in neighboring countries
 Domestic policies of limited impact
• No breakdown between federal, regional and local taxes
• No consideration for supra-national tax harmonization
– EU constraints
(ex.: VAT)
– Other commitments
(ex.: taxation of air transport)
– Tax competition
(ex.: capital income)
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Purpose of taxation ?
• Allocation :
To finance public expenditure
• Redistribution :
To lower inequality
• Stabilization :
To collect more (less) in good (bad) times
• Incentive :
To alter behaviors
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Impact of taxation on growth
• Allocation :
Need to finance schools, infrastructure, …
• Redistribution :
Inequality hinders growth
• Stabilization :
Volatility hinders growth (risk premium, hysteresis, …)
• Incentive :
Adverse behavior goes against global efficiency
• Cf. Gaëtan Nicodème
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Taxes against Growth ?
• Taxes do alter behaviors … in a less productive way
• Concept : the deadweight loss of taxation
– The higher the tax rate, the stronger the incentive to deviate from first choice behavior
– The larger the discrepancies between tax rates, the stronger the biases
– The higher the price elasticity of demand, the bigger the impact on behavior
• Theoretical impact
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First, to tax negative externalities
Better to have low taxes
Better to have low tax rates and a broad tax basis than the opposite
Better to have same tax rates for substitutes
Better to tax inelastic and immobile tax bases
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Beyond the deadweight loss
Other requirements of growth
– Provision of public services
– Less inequality
– Sense of justice
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Tax policy and structural reforms
Three articulations between tax policy and structural reforms
• Tax measure as component of structural reforms
– Ex.: to lower taxes on minimum wage to promote employment
and to fight against unemployment trap
• Tax measure as sweetener for structural reforms
– Ex.: to suspend automatic wage indexation combined with lower taxes on low income
• Tax measure as time manager for reforms
– Ex.: to lower taxes in order to support activity over the short term when measures for
more labor market flexibility have initially a negative impact on employment
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From least to most growth detrimental
Traditional hierarchy
• Negative externalities (pollution)
• Real estate
• Financial assets
• Consumption
• Labor
• Entrepreneurship
Requires fine tuning
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Ex.: to stimulate entrepreneurship
≠ low taxation on all corporation & capital income (entrepreneurship = to tax rents)
≠ tax privileged stock options
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What is it NOT about ?
A very partial view
• Fiscal federalism
• Tax administration
• Tax compliance
• 2015 tax shift
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What to do in Belgium ?
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Modesty
Critical eye on specificities
• General wisdom :
when you are the exception, do consider that the others have it right
• Belgium has specificities
– Overall tax/GDP ratio: high
– Corporate taxes:
high rate BUT ACE
– Personal income taxes: very fast progressivity of tax schedule, many tax expenses, high taxes
on labor, low yearly taxes on real estate, no tax on capital gains, …
– Consumption taxes:
weight of products not at normal VAT rate
– Environment taxes:
light
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To cooperate first
• Specificities go against cooperation
• Specificities go against Europe
• Illustrations :
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Notional interest
Tax shelter for movies
Low excise duties on tobacco products
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Entrepreneurship
• Reform should be at most be revenue neutral
• To consider at European level lower effective tax rates (towards NO taxation at
the corporation level ?)
• Either to generalize ACE (allowance for corporate equity) in Europe OR to
eliminate it, combined with lower corporate rate
• To improve the alternative minimum tax system
• To eliminate the SME tax rate schedule … and to limit the corporate regime to
real corporations (cf. Germany)
• To lower the scope for professional expenses (restaurants, cars, …)
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Social security contributions
• Towards a single regime to promote professional mobility
• Unemployment trap, extended
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To work or not ?
To work full time or not ?
To try to get promoted or not ?
To « do-it-yourself » or not ?
To go for early retirement or not ?
• Cf. Dejemeppe & Van der Linden
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Personal income taxes
• Against distortions (“le bon impôt”)
– Globalization
– Less tax expenses (mortgages, savings, replacement income, living
allowances, sportsmen, sector exceptions, …)
– Less alternative ways (company cars, private pensions, stock options,
author’s rights, …)
– Exception for positive externalities : alternative tax expenses for vocational
training, training where skill shortage, …
• Progressivity
– Slower
– 50% tax rate no absolute limit per se
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Income distribution
Positive impact of redistribution on growth
• Marginal propensity to consume
• Family investment in human capital
• Incentive : why to try to be more productive if wages are capped ?
• Adverse impact of social tension (Alesina & Perotti, 1993)
• Rent-seeking behaviors do hinder growth
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Environmental/health taxes + rents
To tax negative externalities
• Private consumption
– Transportation
– Heating oil + natural gas
– Tobacco
– Junk food
• Professional use (despite international competition)
– Production (industry, agriculture)
– Transport (freight)
A broader perspective on externalities
• To tax rent-seeking behaviors
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Others
Many other issues
• Consumption
• Real estate
• Capital income
• Capital
• Inheritance
• …
Cf. the paper for SOME additional remarks
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Conclusion
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Conclusion
• A lot can be done at national level
– Efficiency
– Equity
– Environment
To be principe-based, to guard against vested interest
• … but international cooperation is top priority
(as in most areas : migration, energy, finance, …)
• … and good co-operation between entities within Belgium is required
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