of these provisions explains the steep profile of the ETR around the minimum wage. The phasing-
out of these reductions however also increases marginal tax rates.
The ETR analysis complements the macro-economic approach. The message it delivers for the
assessment of the quality of tax revenue is that taxation of labour, that is globally high, has been
significantly reduced for low wage earners, who are also the most concerned by structural
unemployment.
3.2.3. Taxation of companies
The computation of EATR and METR exhibits some of the non neutralities of the system^15. The
preferential tax treatment for debt is not specific to Belgium but the non taxation of capital gains favours
retained earnings compared to new shares issues. This holds mainly for small companies for which we
may consider that the PIT treatment of interest, dividend and capital gains is factored into the cost of
capital. Small companies may however enjoy reduced CIT rates, they add to the non-neutralities of the
tax system. Other non-neutralities arise from the preferential tax regimes, the most important one being
the coordination centre regime. VALENDUC (2004a) concludes that the preferential tax regime of the
Belgian coordination centres makes METR negative. This may create a misallocation of resources, since
it makes non-profitable investment profitable after tax (incentives).
The introduction of the Allowance for Corporate Equity (ACE) on 1st January radically changes the
picture. The discrimination between debt and equity has been partially removed and the coordination
centre regime has been phased out.
As indicated above, METR and AETR do not tell the whole story about the dispersion in effective
taxation. HALLEUX and VALENDUC (2007) compute backward looking ETR at the micro-level, based
on a data set that combines tax and accounting data. They conclude that the dispersion of effective
taxation is high and broadly unrelated to the size of the company. “Disregarded charges”^16 are the main
reason for the dispersion of effective taxation. These have been increased over the past 5-10 years, so
that they presume that CIT has not move to greater neutrality over time.
(^15) See VALENDUC (2004a) and VALENDUC (2005), for detailed investigations.
(^16) Disregarded charges are expenses that are not deductible from the tax base.