The Return of the Deficit: Public Finance in Belgium over 2000-2010

4. Tax Revenue and Tax Policy. A Decennium of Tax Cuts

Tax Revenue and Tax Policy 95 Tax Revenue and Tax Policy a decade oF tax cuts André Decoster, Marcel Gerard, and Christian Valenduc 1 During the nineties, the tax policy stance was clearly subordinated to the fiscal consolidation strategy of the federal government. “Maastricht” and “3%” were the key word and figure that dominated the decennia (Decoster, Gérard and Valenduc, 2001). On the revenue side, two main reforms contributed to fiscal consolidation: the automatic indexation of personal income tax was suspended, apart for the zero rate bands and the related family tax credits, and a crisis surcharge was introduced for personal income taxes (PIT in the rest of this chapter) and corporate income taxes (CIT in the rest of this chapter). On the CIT side, the nineties appears to be, ex post, a decennium of base broadening and the gap between nominal and effective taxation was substantially reduced (Valenduc, 1999). Finally, on the PIT side, no new tax expenditures were introduced and the tax incentives for long-term savings were made less generous by replacing allowances evaluated at the marginal tax rate by a tax credit that ranged from 30 to 40%. The fiscal environment changed radically at the turn of the century. The words “room for manoeuvre” came back into the glossary of tax policy 1. André Decoster is Professor at the Catholic University of Leuven (KU Leuven) and Deputy Director of the Belgian Institute of Public Finance. Marcel Gérard is Professor at the Catholic University of Louvain (UCL). ChristianValenduc is General Advisor at the Belgian Ministry of Finance, guest lecturer at the University of Namur and at the Catholic University of Louvain (UCL), and Director of the Belgian Institute of Public Finance. 4. 96 The Return of the Deficit makers and the “tax to GDP ratio” (2 ) exhibited a downward trend that contrasted with the outcome of the contribution of tax policy to fiscal consolidation that prevailed during the nineties. figure 1: Taxes and social security contributions, % GDP 40.5% 41.0% 41.5% 42.0% 42.5% 43.0% 43.5% 44.0% 44.5% 45.0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years % GDP Source: National Accounts Institute – own calculations The coalition agreement of the “rainbow” government (a coalition of liberals , socialists and green) that arose after the 1999 election included PIT tax reform of which the main objectives were to reduce the taxation of earned income and to have full tax neutrality between singles and spouses. The tax cut was significant (€ 3.3 billion). In addition, new tax expenditures were introduced, the cost of which increased over the decennium. On the CIT side, the “rainbow” government opted for a “broad based low rate” tax reform that aimed to be revenue neutral. The next government made a more fundamental reform in introducing the allowance for corporate equity as a substitute for the coordination centre regime that had to be abolished in accordance with the implementation of the EU code of conduct on business taxation. That reform was also intended to be revenue neutral but, as will be documented later in this chapter, there are strong presumptions that that was in fact not the case and that the reform had a significant negative impact on CIT tax revenue. 2. Sum of taxes and social security contributions revenue, expressed as % GDP. Tax Revenue and Tax Policy 97 Finally, on the social contributions side, reductions in the employer’s contributions contributed to the reduction of the tax wedge on labour, and targeted measures were also introduced to raise the employment rate of the long-term unemployed. In addition, wage subsidies were introduced through the tax system to ease the labour cost of researchers, time and shift workers, and overtime work. Section 1 of this chapter describes how the tax policy conducted during the last decade affected the taxation of labour, capital and consumption. Section 2 discusses the effects of the main reforms that have been introduced . In Section 3, we turn to the “silent” part of the tax policy conducted during the nineties: reforms that have not been carried out, and that could have contributed in a positive way to the main problems of the Belgian tax system: the absence of neutrality in the taxation of savings and the lack of a green tax reform that could address the climate change issue...