The recent tax reform was aimed to be neutral from a distributional point of view, according to the
simulations performed prior to the reform^18. Post reform data^19 indicates that inequality has increased
and that the redistributive effect has decreased. This might partially be explained by the introduction of
refundable tax credits: households that were not subject to tax were not include in the tax statistics before
the reform but are included now that they enjoy a refund of their tax credit. There has indeed been a
strong increase of the number of households in low taxable income brackets. Other explanations might be
a change in economic conditions or behavioural effects of the tax reform that were not captured on the
ex-ante simulations^20.
More work is clearly needed to understand the difference between ex-ante simulation and ex-post data.
Despite this, the redistributive effect of taxation is still significant: the drop recorded over the 2002-04
period brings it to the level recorded in the early nineties.
3.4 The use of tax incentives: insight from the tax expenditure reports
As indicated above, the “revenue forgone” only gives a rough indication of the economic effects of tax
expenditures. Apart from bringing transparency in the budget process, its main merit is to indicate where
further examination is required.
Table 3 - Revenue forgone from tax expenditures
2000 2001 2002 2003 2004
(a) Personal income tax 12.4% 12.3% 12.3% 13.5% n.a
(b) Corportate income tax 28.0% 34.6% 32.7% 29.4% n.a
(c) Withholding tax on interest and
dividends.15.9% 14.9% 17.1% 18.8% 19.9%(d) Excise duties 3.8% 4.0% 4.5% 3.7% 3.5%
(e) VAT 4.5% 5.5% 5.7% 5.9% 5.5%
Source: Tax expenditure reportsTax expenditure reports indicate that there is significant room for base broadening in CIT, taxation of
savings and Personal income taxation. On the corporate income tax side, the main tax expenditure is the
preferential tax regime for coordination centres. This regime is phased out and has been replaced by the
ACE system. The allowance for corporate equity will not expand the tax base, but will anyway bring
more neutrality into the tax system. On the PIT side, the main tax expenditures are the tax breaks for
transfer income, for pension savings and owner-occupied housing. The exemption of withholding tax for
savings accounts is the largest tax expenditure under item (c).
Apart from the tax breaks for transfer income, the main tax expenditures are in the taxation of savings:
the “revenue forgone approach” highlights the consequence of the non-neutralities in the taxation of
savings that the ETR methodology already pointed out.
(^18) Cf. VALENDUC (2002) for the ex-ante simulations.
(^19) Table 2 refers to taxable periods; this means that income and tax are recorded for the period during which income has
been earned. It is a fully accrual view. As the tax reform was fully implemented in 2004, the latest year of Table 2 may
be interpreted as post reform. This does not hold for Table 1, that uses ESA recording. As most of the effects of the tax
reform was not included in the withholding tax on wages but postponed until assessment, the effect is postponed to
2005-06 in the conceptual framework used for Table 1.
(^20) The simulations were conducted with a static model.