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