Tax Freedom Day® (TFD), the symbolic day when each Belgian stops paying tax and starts working for his own account, assuming that everything he/she earned till then was entirely paid over in tax, falls this year, just as last year, on 14 June. This is the result of the eighth successive edition of the PwC study, which was again this year carried out in conjunction with Wim Moesen, Professor Emeritus at the Faculty of Economics and Business at the KU Leuven. Even though the overall tax burden as a percentage of GDP fell slightly in our country compared to last year, from 45% to 44.9%, that drop is not enough to shift the TFD date in any positive sense. The fact is that, with a tax burden of nearly 45%, Belgium continues to be one of the world’s heaviest-taxed countries. And so we continue to be faced with the question of just how efficient our government is: given the scope of the revenue raised by government, does the Belgian public get enough in return for their tax euros in terms of government efficiency and/or economic competitiveness? In the following, we also look at the possibility of adjusting our tax system in order to stimulate growth in our country, resulting in a bold, but feasible, proposal for introducing a low flat rate of corporation tax.
To calculate TFD, the total sum paid in taxes (based on information from the Federal Budget Office), including social security contributions, is divided by the gross domestic product figure. For 2013, this comes out at 44.9%. If we project this percentage over a year (starting on 1 January), TFD this year thus falls on 14 June, just as it did last year. “In the first few years of the study, TFD in Belgium fell on 8 or 10 June,” says Frank Dierckx, Managing Partner of Tax Consultants at PwC. “Last year saw this negative shift back to 14 June, a trend that is further confirmed this year. It’s actually no surprise that we remain stuck on that date this year, too. The consequences of the tax rises that the government pushed through in December 2011 are now clearly noticeable, whereas our GDP, which is still labouring under the effects of the economic crisis, does not seem to be large enough to cushion that impact.”
With a tax burden of nearly 45%, this country continues to be one of the heaviest-taxed nations, especially compared to our neighbours. It is conspicuous that virtually all the countries around us have shifted TFD back compared to last year. Thus, TFD this year falls on 27 May in the Netherlands (against 23 May), on 21 May in Luxembourg (against 20 May) and on 4 June (against 3 June) in Germany. Only the UK, where TFD falls on 30 May for the fourth year in a row, seems to be holding its position. The big exception to the rule is France. For the first time since the study began, our southern neighbours have ‘caught up’ with us. With a tax burden of 46.3%, the highest ever, France’s TFD this year doesn’t falls till 19 June (against 12 June last year).
Last year’s study already amply demonstrated the social importance of taxes. The general public do get a lot in return for the tax they pay: schools, infrastructure, courts administration, police and fire fighters, and the redistribution that goes on under our welfare system. “Contrary to what some observers have the temerity to contend, TFD is not a plea to abolish taxes. But, given the weight of the tax burden, we do nevertheless question whether what we, the general public, get back in terms of government efficiency and competitiveness bears a just relation to that hefty revenue bill,” says Dierckx.
So, how efficient is our country’s government, then? All too often, it is assumed that bigger government budgets mean greater efficiency. A fallacy, says Wim Moesen, Professor Emeritus at the Economic Department of the KULeuven. Back in the 2008 study, he already showed that there is no correlation between the size of the government’s budget and the quality of the administrative machine. In support of this, Professor Moesen cites inter alia data from the World Bank and the Global Economic Competitiveness Indicator, an annual study in which the World Economic Forum fixes a country’s economic effectiveness and institutional quality on the basis of data from 140 countries and 110 indicators. Professor Moesen: “The quality of the government machine is an important factor for a country’s competitiveness. But that quality is not connected to the size of the government’s budget, as can be seen from a detailed comparison between our country’s data and that for Sweden. Both countries’ government budgets are at around the same level and both come equal fifth place in the budget rankings. But, if we look at the ranking in terms of bureaucratic efficiency, we see Sweden in third place, whereas Belgium only manages eleventh place.”
Moesen attributes the discrepancy to “civic capital”, an indicator he already mentioned in the last study. Put simply, civic capital is the quality of a country’s official apparatus. It implies an integral government that imbues the markets with sufficient confidence that it is able to take action when needed, an efficient civil service organisation that is able to enforce compliance with the rules that have been enacted, and necessary levels of citizenship, meaning more or less a populace that shares the right standards and values that show that the rules laid down meet with general approval. “Our analysis of the data reveals that there is a direct relationship between a country’s civic capital and its competitiveness. If we look to the connection between the two, we see, for instance, that the so-called PIGS nations lag pretty far behind, whereas the Scandinavian countries stand out at the very top of the graph. Belgium is in the middle. The difference between Belgium and Sweden has a lot to do with culture, especially political culture. We still have a system of political appointments, which is something absent in Sweden. Greater civic capital leads automatically to greater economic performance and is a measure for a country’s institutional quality. Thus, our government must not only look at possible tax increases to generate more revenue but also has to take the right decisions in terms of policy and public administration so as to bring about a rise in civic capital, which will in turn deliver more economic well-being,” says Professor Moesen.
Another important factor for creating well-being and economic growth is of course the nation’s tax system. The tax system has to be organised such that it promotes lasting growth. In last year’s TFD report, a number of recommendations were already put forward for tax reforms in our country based on the findings in the UK’s Mirrleess Review and the Dutch Continuity and Renewal report. Those recommendations are still of value according to Frank Dierckx, and can still be used as a basis for reforming our tax system. Because a ground-up reform of our tax system is far from imminent, the study looks at the possibility of reforming corporate income tax: an OECD research project embarked upon as far back as 1997, in which the Organisation looks into how tax structures impact GDP growth, has revealed that corporation tax is the form of tax that has the most negative impact on growth of GDP.
“Of course, we could just leave everything the way it is,” says Frank Dierckx, “but we now know that that’s not the best choice. The introduction of the notional interest deduction in 2006 greatly improved our ability to attract foreign investment. But, it’s an inescapable fact that the reforms to the system have also caused a number of (finance) companies to withdraw from the country. Given the negative impact that corporate income tax has on economic growth, the best thing would be to do away with it altogether. That is of course not an option, since the government would lose all the revenue it gets from company taxation. Hence, our, maybe drastic, proposal is to introduce a low flat rate for taxing company profits. The comparison between the Belgian tax system and those of the rest of the EU indicates that a flat tax of 3 or 4% of the current tax base would be ideal. A measure of this sort would attract more business and also enlarge the tax base, enabling the government to raise more tax. Look at Cyprus, for example, which charges a rate of 12.5%. The revenue it raises compared to GDP is, comparatively, twice as high as before introduction of the low rate.” Frank Dierckx still says that none of this would avoid the imperative ground-up, general reform that our tax system is in need of, but it can certainly form part of that process.