STRUCTURE OF TAX REVENUE AND THE QUALITY OF PUBLIC
FINANCE
Christian Valenduc (Federal Ministry of Finance Belgium)^1Paper completed: January 2005 (updated February 2008)This paper summarises the methodological part of the presentation made at the 4th meeting of the
working group “Quality of Public Finance” that took place in Brussels, last 27^ January 2005. The
purpose of the presentation was to suggest a methodology for the evaluation of the quality of tax revenue,
with application to the Belgian tax system. We have included further evidence on the recent
developments of the Belgian tax system.
Section 1 sets out the framework. Section 2 lists indicators that could be used to assess the quality of
public finance. In section 3 we apply the suggested methodology to the Belgian tax system.
1. The framework
Evaluating the quality of public finance is a difficult task. We have well-known indicators about the
“quantity of taxes”. Such indicators, as tax/GDP ratios^2 , are however not appropriate – and may be
misleading, see below -, since quality and quantity are two very different topics. There is some evidence
that changes in the tax/GDP ratio could lead to change in growth and employment but this is only a
rough and partial insight into the quality of tax revenue: the two countries that top the tax/GDP ratio
ranking (Denmark and Sweden) do not exhibit low employment rates and Finland is quoted as one of the
most competitive of the world despite a relatively high tax/GDP ratio. Quality is not necessarily inversely
related to quantity but higher the tax/GDP ratio, higher should be the attention given to the quality of tax
revenue since most distortions are positively related to the size of tax wedge.
The quality of tax revenue refers more to the structure of the tax system than to the overall level of
taxation. There is some evidence, for example, that consumption taxes might be less damaging for
growth and employment than direct taxes. But the story is more complicated: some direct (or indirect)
taxes might be more distortive than others and the way the taxes are designed matters. The devil might be
in the details. The tax wedge on wages, for example, may have very different effects depending on the
wage level. Two different tax systems, the first one with one broad base and a low rate for PIT or CIT,
the second one with an extensive use of tax expenditures and higher rates on the non-exempted of the tax
base, may result in the same amount of revenue collected but this does not mean they equal in quality.
In addition, evaluating the quality of public finance is even more complicated by the conflicting nature of
tax policy objectives. “Quality” may refer to a pro-growth or an employment-friendly tax system.
(^1) Christian Valenduc is Senior Advisor in the Studies Department of Federal Ministry of Finance, Brussels. The author is
also lecturer at the universities of Louvain-La-Neuve (UCL) and Mons (FUCAM). He chairs the OECD Working Party
on Tax Policy Analysis. This paper only expresses personal views.
(^2) Cf. OECD (2007a) and EUROPEAN COMMISSION (2007)