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3.3. The Efficiency-Equity trade-off

Our examination of effective taxation points out a high but progressive taxation of labour. Labour
income is the main component of the tax base and the counterpart of progressive taxation should be
income redistribution.

Figure 5 and Table 2 apply the KAKWANI’s methodology for the measurement of income
redistribution. The redistributive effect of Personal Income Tax effectively increased during the nineties.
According to DECOSTER e.a (2002), the explanation lies in the reforms that were introduced for the
budget consolidation during the nineties: as indicated above, an additional crisis surcharge (3% of PIT)
was introduced and the automatic indexation of the personal income tax was partially suspended. Those
reforms increased average and marginal tax rates but also resulted in increased redistribution through
personal income tax. Equity was clearly favoured compared to efficiency.

Figure 5 – Personal income tax and redistribution

0,000

0,050

0,100

0,150

0,200

0,250

0,300

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years

Average tax rate (t) and Progressivity

(P)

0,058

0,060

0,062

0,064

0,066

0,068

0,070

0,072

0,074

0,076

Redistribution

Progressivity Average tax rate Redistribution

Source: Statistics Belgium – Own calculations

Table 2 - Inequality, progressivity and redistribution

2000-2004

2000 2001 2002 2003 2004

Income inequality, before tax 0.388 0.384 0.405 0.414 0.432

Income inequality, after tax 0.313 0.310 0.334 0.345 0.367

Redistribution 0.074 0.074 0.071 0.068 0.065

Progressivity 0.203 0.20 4 0.202 0.207 0.213

Average tax rate 26.8% 26.6% 26.0% 24.9% 23.4%

Source: Statistics Belgium – Own calculations