Tax Autonomy in Personal income TaxationComments on François Vaillancourt

Christian VALENDUCStudies Department – Ministry of Finance, UCL (LLN, Mons)

Tax Autonomy in PIT

Pro and cons of Tax autonomy in PIT

Lessons from Canada Questions on the Canadian

experience The Belgian experience Lessons for Belgium ?

Pro and Cons of tax autonomy in PIT Tax autonomy increases the accountability of sub-

central and local governments OLSON theorem: TA reconciles the taxpayer, the voter and

the citizen who benefit from public spending Requires clear visibility of the sub-central taxes

Tax competition Pressure on excessive size of Leviathan governements

versus under provision of public goods Distorsion of the tax mix (in line with the Ramsey Rule but

may also have adverse economic effect) Competition for mobile bases: limited in the PIT case Yardstick competition and tax mimicking : empirical

evidence Tax competition may have an adverse effect on

redistribution

Lessons from Canada Tax Autonomy since 2001 has been widely

used by the Canadian provinces Facts on brackets and rates

Inverted U-curve of the CV of tax brackets The highest rate exhibits the lowest CV across states

The Canadian model seems to minimise vertical externalities to some extent: provinces have a strong incentive not to change the tax base, but have large flexibility on rates

The use of TA has not been at the expense of « Cooperative federalism »

No major impact on the Canadian economy

Questions on the Canadian Experience Taxes and spending

Are higher rates correlated with higher spending, or compensated by changes in the tax mix of provinces (provincial VAT) ?

What about progressivity ? Back to facts (CV of tax brackets and tax

rates) Yardtsick competition on the middle class ?

Or dispersion correlated with spending ? Tax competition and the right hand side of

the income scale ? What about compliance costs ?

The Belgian Experience Prior to the 2001 reform

Linear surcharges: Regions had to mirror the progressivity of the federal PIT

Nearly no use of it After the 2001 reform: rate autonomy on PIT but

May not reduce the progressivity of PIT (explicit definition) May not result in harmful tax competition (no explicit

definition) May not exceed +/- 6,75% of the PIT revenue of the Region Regions may set up their own tax incentives Just used by Flanders, but not up to -6.75%, clear link with

election year Up to now, the visisbility of the regional PIT is close to

zero.. But the visibility of tax reforms implemented by Regions

may be very high

Lessons for Belgium? Canada is not Belgium (of course..!)

The conclusion « no dammage » might not be translated as such, mainly relating to Brussels vers Fl/W

More visibility should be given to the regional PIT

Tradeoff between vertical externalities and flexibility on rates

Canada: large flexibility on rates, vertical externality minimised

Belgium Low flexibility Vertical externalities maximised Externalities work in a asymetric way If true, this means that the Belgian system requires a

strong vertical political consensus…