03 november 2020
18:15
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The taxes on capital and wealth in our country form a colorful patchwork quilt that weighs heavily, but which also has some firm holes.
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The tax makes the agreement in the coalition agreement concrete that ‘the government will strive for a fair contribution from those persons who have the greatest means to contribute, with respect for entrepreneurship’. To gold the pill, it is called a solidarity contribution and it says that the proceeds, estimated at 428 million euros per year, go to health care.
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The new levy ignites the discussion about capital (profit) tax. “Capital and wealth are already heavily taxed in our country,” some say. ‘Not’, say others, who point out that it is precisely in that area that a lot of income escapes tax and that remedies must be made to make our taxation more fair.
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They are both right. It depends on how you look at it.
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“Capital and wealth are already heavily taxed,” some say. ‘No’, say others, who point out that it is precisely in that area that a lot of income escapes tax.
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Leader
Taxes on capital generate 51.5 billion euros in Belgium (figure for 2018) and account for about a quarter of tax revenues, according to the overview ‘Taxation Trends in the EU 2020’, a publication by the European Commission. In relation to the gross domestic product (GDP), taxes on capital amount to 11.2 percent. This makes Belgium the leader in Europe after France.
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The European Commission has a broad definition of taxes on capital. This also includes corporate tax and taxes on income of self-employed persons, arguing that these are taxes on business. There is much to be said for classifying them as taxes on capital. Together they account for more than half of Belgian capital taxes.
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With regard to the tax on capital stock (4.1 percent of GDP), Belgium is in fifth place in the European leading group. But taxes on household income only amount to 0.4 percent of GDP. This puts Belgium in the European tail (22nd place).
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‘Taxation Trends’ also zooms in on real estate taxes. In Belgium, these generate 16.2 billion euros, they amount to 3 percent of GDP. That is good for a European bronze medal. The European average is 2.2 percent.
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One third of the property taxes in our country are recurring, the largest part concerns ‘other’ taxes. This includes registration duties and inheritance taxes, so-called transaction taxes because they are levied in a transaction involving the property.
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Real pressure
Expressing taxes as a percentage of GDP is a commonly used measure for making (international) comparisons. But it says little about the actual tax burden, some argue, especially when it comes to capital taxes. Some countries have more capital and assets than others, which means that income is sometimes higher. To get a more correct picture, it is necessary to look at tax revenues in relation to the taxable basis.
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That calculation is made in the publication ‘Taxation Trends in the EU 2020’ – a difficult exercise, with a number of flaws. This teaches that the effective tax rate on capital in Belgium is 40 percent. In Europe, too, we are in second place, after France.
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Several years ago, the OECD, the industrialized nations club, made a similar calculation for the effective tax rate on the income of different asset classes. This shows that these vary widely.
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About half of the real return (after inflation) from residential real estate is skimmed off by taxes (registration duties are included in this). Much less is that for the owner-occupied home financed with a tax-deductible mortgage loan.
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Compared to other countries, interest income on bonds and equity dividends is heavily taxed in Belgium and capital gains from equity investments and income from pension tax are little or not at all.
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This is 40 percent for dividend income. The tax burden on capital gains from equity investments, on the other hand, is close to zero and in the income from private pension investments there is even a remarkable tax gain due to the tax deductions they offer in personal income tax. Compared to other countries, interest income on bonds and equity dividends is heavily taxed in Belgium and capital gains from equity investments and income from pension tax are little or not at all.
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Conclusion: capital in the broad sense is taxed relatively heavily in our country. But it is a colorful patchwork, with pieces that weigh heavier and others that are a lot lighter. And there are some big holes in it.
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Skews
In her latest report on Belgium (February 2020) the OECD writes that the different tax treatment of income from financial investments leads to an inefficient allocation of resources and to a number of economic distortions. The organization points out, among other things, the phenomenon of placing activities in a company, also by self-employed persons and liberal professions. And the tendency not to distribute profits as dividends, but to keep them in the company where they then form untaxed capital gains.
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The OECD advocates equal taxation of income from the different forms of investments. “An increase in the tax on the capital gains of individuals can create the scope for a further reduction in corporate taxes, which can stimulate investment,” it says.
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In its latest report (March 2020) on our country, the International Monetary Fund insists on the same nail and even extends the recommendation for equal treatment to real estate income.
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Quick win
The Tax Department of the High Council of Finance, who put forward proposals for a tax reform in May this year, recognizes that tax revenues from capital in Belgium are already relatively high. She sees little room for additional taxes in property taxation, where the pressure of property tax is already high, except for taxing the actual rental income from rented residential real estate.
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There is a possibility with regard to movable income. The taxable basis can be broadened by abolishing the favorable regimes for, among other things, the regulated savings account, reducing the deductions for long-term savings in personal income tax and taxing capital gains from shares and income from capitalization funds. The extra revenues that this generates can be used to co-finance a tax reduction on labor, says the Supreme Finance Council.
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It does not seem logical that the De Croo government, with its new securities tax, specifically opts for additional taxation of an asset class that is already subject to considerable tax pressure.
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It does not seem logical that the De Croo government, with its new securities tax, specifically opts for additional taxation of an asset class that is already subject to considerable tax pressure. But perhaps she chooses the path of least resistance, and a tax that is technically quite easy to introduce and collect. The quick win.
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The gaps in wealth tax – such as not taxing actual rental income and capital gains on shares – are not being closed. But perhaps that will happen in the in-depth tax reform that the government is aiming for by 2024, and then the old patchwork will be replaced by a new one with a more uniform pattern.
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