Which way the pendulum swings? Equity and efficiency of three decades of tax-benefit reforms in Belgium

TitleWhich way the pendulum swings? Equity and efficiency of three decades of tax-benefit reforms in Belgium
Publication TypeWorking Paper
PublisherCSB Deleeck
Place PublishedAntwerpen
Year of Publication2019
NumberWP 19/07
Date Published04/2019

Belgium has seen major changes in its tax-benefit system over the 28 year period 1992-
2020. These changes have, to a large extent, co-determined the evolution of disposable
incomes of Belgian households on the one hand, and work incentives on the other. In this
paper we assess changes in tax-benefit policies over the full course of 1992-2020 along
three dimensions: equity, efficiency and budgetary impact. We construct counterfactual
distributions of disposable incomes under alternative tax benefit systems by means of the
arithmetic microsimulation model EUROMOD. We summarize distributional effects of
changes in the tax benefit system by measuring the impact on inequality of pre-tax and
transfer income, and the impact on work incentives by aggregating the marginal tax rates at
the intensive and extensive margin into the marginal cost of public funds. We find that
most changes in the tax-benefit system have been pro-poor and that the redistributive
power has -depending on the chosen benchmark- either been increased, or remained stable.
Two reductions of personal income taxes eroded the redistributive power of the tax benefit
system. Work incentives deteriorated under the tax hikes of the fiscal consolidation period
in the nineties. The improvement of work incentives was considerable thanks to the
introduction of an earned income tax credit, and the lowering of personal income taxes and
social security contributions, but came at a large budgetary cost. Finally, the size of some
of the effects crucially depends on the choice of the ‘no policy change’ counterfactual:
either indexation with inflation or indexation with nominal wage growth.

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