About shifty tax shifts

The buzz word in Belgian politics these days is ‘tax shift’. Forget about reducing taxes or cutting expenditure, the tax burden is to be shifted. The question is how and where.

For many years, AmCham Belgium has been lobbying the government to reduce employment costs. As Eurostat’s figures show, Belgium has the highest labor cost within the eurozone, and within the EU, Belgium comes second after Denmark. That is not only the result of high salaries, but also of high social security and high taxes on these salaries.

For years, the European Commission and the OECD have been underlining that Belgium relies too heavily on taxes and social security contributions on labor with a negative effect on job creation. A wage handicap not only deters potential investors, it also discourages employers from creating or maintaining jobs. This government has understood that for a small country, competitiveness is essential to ensure exports, jobs and maintain social security with a balanced budget. It has put jobs and competitiveness at the top of its agenda. The ‘index jump’, skipping one automatic wage indexation, is a little step in the right direction, but it is far from enough.

The OECD recommends a shift to higher taxes on consumption, pollution and capital gains, such as the sale of property or shares. When Prime Minister Charles Michel presented the plans of his government, he announced a major income tax reform combined with a tax shift from tax and social security to excise duties on tobacco and diesel fuel, VAT on plastic surgery and a transparency tax on overseas legal arrangements. This is not a tax shift. It is just some repair work in the margin.

The good news is that everyone seems to agree that a tax shift is needed to make the economy more competitive. The first question is who is to benefit. Employers want a lower cost of employment, but that does not mean that they want to pay higher net salaries. Finance Minister Johan Van Overtveldt has already stated he wants both: reduce the cost of employment to encourage the creation of new jobs, but also increase net income for workers.

The important question is, however, in which direction the tax must be shifted? Minister Van Overtveldt has now done the rounds and proposed a number of routes to his colleagues in government.

Tax the wealthy?

Some, like CD&V who like to present themselves as the social conscience of the government, insist that the tax shift must make the tax system more equitable, by reducing the tax on labor in favour of a tax on wealth. They propose a variety of measures, going from a general wealth tax, over a tax on wealth accumulation and a higher tax on company cars, to a higher tax for landlords who are currently paying very little tax.

There is – in theory – a lot to be said about taxing the wealthy: only the wealthy find such a tax objectionable. Moreover, it is getting ever more difficult to hide wealth, with FATCA and the coming Common Reporting Standard looming around the corner. However, introducing a wealth tax or a more equitable tax on landlords will require a lot of work from the tax administration, by setting up a register of our possessions (a word that gives many goosebumps) or reviewing the cadastral revenue of each property.

More importantly, it goes against the promises of the liberal (read conservative) parties Open VLD and MR, as well as N-VA, who had pledged not to hurt the middle classes who had been hit hardest by the previous government (with a higher tax on company cars and liquidation dividends). There will be no wealth tax, but a speculation tax would be acceptable for these parties. Taxpayers who sell their shares within three or six months would pay capital gains tax. That would not be too harmful for the economy, but it is unlikely that it would raise a lot of new tax money.

Tax consumption?

Another direction promoted by the OECD is to increase the tax on consumption. In Belgium, the standard VAT rate is 21%, but there are many exceptions at 6% or at 12% for basic consumption products and the house-building sector. It has been calculated that abolishing all reduced VAT rates could raise €9 billion. Even if Belgium was to reduce the number of exceptions to those given in most neighbouring countries, that would still give an additional €4 billion. Each billion would give 10,000 new jobs.

The problem that some see is that raising the VAT rate for basic needs may hit the people with the lower wages more than others. However, that could be compensated by a higher VAT on luxury items. A long time ago, Belgium used to have a 33% VAT on luxury products.

The main argument for raising the VAT is that VAT is a tax that is easy and efficient to administer and hard to escape. A higher VAT hits everyone equally. Workers and retirees will pay more but so will the tax dodgers, the wealthy and the retirees with unearned income.

Abandoning the 6% and 12% VAT rates in favor of a single rate of 21% is not an option, but one viable route is to replace these two rates by a single rate of 8%. That would increase the price of basic products like food and bread a bit, but it would also reduce the current rate for the hotel and restaurant business (12%) that are labor-intensive sectors. The refurbishment business would see its VAT rate go up.

Furthermore, it is hard to defend that essentials such as wellness services or chips from the local chip shop need a 6% VAT rate. That is why it is also likely that the 6% VAT rate on electricity will go up to 21%. That was a cheap trick of the previous government under Di Rupo to crank up competitiveness.

Tax pollution?

A strong alternative is to use the tax shift to protect our health and our environment. A tax on really toxic products can reduce emissions of CO2 and particulate matter. A tax shift can help correct the inefficiency of the market that just cannot make our economy greener. The government has already raised the excise duties on diesel. It may continue in the same vein and bring the price of diesel to the level of that of gasoline, even if diesel is more polluting.

Tax simplification?

The Belgian tax system is very complex and some have advocated using the tax shift to simplify the system. Every new concession, every tax reduction and every tax credit comes with a complex set of rules; only tax experts find their way in that maze of new rules. A complex tax system is not a fair tax system. Moreover, simplifying the tax rules makes it easier and more efficient to collect the tax.

It is simply unrealistic to expect an entire overhaul of the tax system. That would take too much time, and time is of the essence. All we can hope is that while the government tinkers at the edges, the Finance Minister will prepare a major income tax that goes beyond satisfying this or that interest groups.

Author: Marc Quaghebeur

Marc Quaghebeur is a Belgian tax lawyer with Cabinet DAVID specialising in international tax issues and cross border estate planning. He is a member of the Brussels Bar and the Society of Trust and Estate Practitioners. He

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