Which way the pendulum Swings. Equity and efficiency of 26 years of tax-benefit reforms in Belgium

Decoster, A., Perelman, S., Vandelannoote, D., Vanheukelom, T., Verbist, G. (2018), Which way the pendulum Swings. Equity and efficiency of 26 years of tax-benefit reforms in Belgium, Discussion Paper DPS 18.16, Department of Economics KU Leuven.

Belgium has seen major changes in its tax-benet system over the past twenty-six years. 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-benet policies over the full course of 1992-2018 along three dimensions: equity, eciency and budgetary impact. We construct counterfactual distributions of disposable incomes under alternative tax benet systems by means of the arithmetic microsimulation model EUROMOD. We summarize distributional effects of changes in the tax benet 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 benet system. Work incentives deteriorated under the tax hikes of the scal 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 eects crucially depends on the choice of the `no policy change' counterfactual: either indexation with inflation or indexation with nominal wage growth.