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Taxation and trend growth :what can be done in Belgium ?

Etienne de CallataÿUniversité 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 – 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– 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– 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

• Correlation between age and wage link with automatic wage indexation• Limited net of tax income gap link with tax privilege for retirees• Access to private pension capital link with set-up & taxation of private pension

schemes • Hardship of traffic congestion 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

Þ 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 – 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• 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 :– 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– 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