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The redistributive character of taxes and social security contributions

  • K. Van Cauter

    (National Bank of Belgium, Research Department)

  • L. Van Meensel

    (National Bank of Belgium, Research Department)

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    The article aims to explain the redistributive character of taxes and social security contributions in Belgium, and to demonstrate the mechanisms behind that redistribution. Compared to the other EU-15 countries, Belgium has less primary income inequality. Moreover, there is a relatively high degree of redistribution in Belgium, so that – after taxes, social benefits and social security contributions – the disparities are among the smallest in Europe. As in other countries, this income redistribution is effected primarily via social benefits. However, redistribution via taxation on income also plays a very important role. The most strongly redistributive tax in Belgium is personal income tax, which is highly progressive. That is due principally to the structure of the tax scales and the amount of the tax allowance, and to the reduction in taxes on replacement incomes. The influence of social security contributions on the redistribution of income is relatively slight, although it is greater than in the majority of the EU-15 countries. VAT, which accounts for the bulk of indirect taxes, is slightly progressive in relation to expenditure, owing to the rate structure whereby the reduced rate and the zero rate apply to goods and services which are consumed to a proportionally greater extent by low-income households. Conversely, in relation to disposable income, VAT is degressive. That is because the savings ratio increases with each income decile. Excise duties are degressive, in relation to both household spending and household income. This study also illustrates the fact that tax measures are seldom neutral in their effect on income redistribution. However, this effect is clearly dependent on the practical aspects of this type of measures. The personal income tax reform approved in 2001 and the introduction of the work bonus increased the progressive effect of the compulsory levies on earned income and reduced the average rate of the levy. While the impact of increases in excise duties on fuel is more mixed in terms of redistribution, the recent increases in excise duty on tobacco have accentuated their degressive character.

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    Article provided by National Bank of Belgium in its journal Economic Review.

    Volume (Year): (2006)
    Issue (Month): i (June)
    Pages: 65-82

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    Handle: RePEc:nbb:ecrart:y:2006:m:june:i:i:p:65-82
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    1. Immervoll, Herwig & Levy, Horacio & Lietz, Christine & Mantovani, Daniela & O'Donoghue, Cathal & Sutherland, Holly & Verbist, Gerlinde, 2006. "Household Incomes and Redistribution in the European Union: Quantifying the Equalising Properties of Taxes and Benefits," Economics Series 184, Institute for Advanced Studies.
    2. Cathal O'Donoghue & Massimo Baldini, 2004. "Modelling the Redistributive Impact of Indirect Taxes in Europe: An Application of EUROMOD," Working Papers 0077, National University of Ireland Galway, Department of Economics, revised 2004.
    3. Verbist, Gerlinde, 2004. "Redistributive effect and progressivity of taxes: an international comparison across the EU using EUROMOD," EUROMOD Working Papers EM5/04, EUROMOD at the Institute for Social and Economic Research.
    4. Kakwani, Nanok C, 1977. "Measurement of Tax Progressivity: An International Comparison," Economic Journal, Royal Economic Society, vol. 87(345), pages 71-80, March.
    5. Verbist, Gerlinde, 2005. "Replacement incomes and taxes: a distributional analysis for the EU-15 countries," EUROMOD Working Papers EM2/05, EUROMOD at the Institute for Social and Economic Research.
    6. Atkinson, Tony & Cantillon, Bea & Marlier, Eric & Nolan, Brian, 2002. "Social Indicators: The EU and Social Inclusion," OUP Catalogue, Oxford University Press, number 9780199253494, December.
    7. Bea Cantillon & Brigit Kerstens & Gerlinde Verbist, 2003. "Les effets redistributifs de la réforme de l'impôt des personnes physiques: résultats de microsimulation," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 46(1), pages 71-98.
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