How the tax system influences the size of the pie

Erasmus School of Economics

In an interview with Belgian newspaper De Morgen, Assistant Professor of Public Economics at Erasmus School of Economics Kevin Spiritus dives into the Belgian tax system. In his opinion, it is of the utmost importance that the system gets reformed into a dual income tax system. 

The idea of a dual income tax is that labour income is taxed progressively: the ones that earn the most, contribute more. On the other hand, capital is taxed with a flat rate. No matter how much you earn with your capital, you pay the same percentage of your income to the fiscal authorities. According to Spiritus, the problem lies with the definition of labour income: ‘all sorts of labour income is taxed as capital income. Employers are then able to give their employees wages by means of company cars and meal cheques, which enables them to contribute less to social security. Hence, all sorts of constructions can be invented to minimise taxes’.

Benefits of the dual income tax

Some people might have demurs, since statistics seem to show that capital is already being heavily taxed. However, Spiritus points out that these statistics are distorted due to the fact that heritages, donations and registration taxes are included in these numbers. Capital gains from share appreciations are not taxed, which leads to skewed data. There are mainly two reasons to implement a dual income tax system. Firstly, it is more fair: people that are capable of contributing the same, are taxed equally. This also has a psychological effect: if a tax seems to be more reasonable and fairer, people are willing to contribute more as well. Furthermore, the system becomes more robust. Since it becomes harder to minimise taxation by creating all these artificial structures, lobbying doesn’t lead as quickly to a different treatment.

Combatting the economic effects of an aging population

Spiritus: ‘aging costs us 25% of the GDP. By 2050, this percentage will have risen to 30%. A big part of our GDP is invested in social security. If we reform the tax system, this will have a positive distributional effect. The reform will lead to a bigger pie, since the efficiency and growth of the economy will increase. The current, different tax rates, lead capital to be invested in a sub-optimal way. Capital is invested in fiscally attractive alternatives instead of the alternatives that have the best outcome for society. If it is invested in innovative companies or research, the economy will grow, and a smaller part of the pie has to be directed towards the aging population. This means that a bigger part can be distributed to other parts of the population’.

Assistant professor
More information

You can read the full interview from De Morgen, 29 July 2021, here

You can read another article with Kevin Spiritus on taxing in a less damaging way here

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