A Flat Tax in Belgium? Some Clarifications on the Principles and Consequences of Such a Reform

This paper analyzes the potential effects of the introduction of a flat rate tax in Belgium. According to the principles of a flat rate tax, allowances, credits, and exemptions considered tax expenditures are repealed, and the progressive tax schedule is replaced by a single marginal tax rate that applies above a zero-rate bracket. There are no deductions for savings, and tax credits for children stay in place. The reform is therefore budget-neutral. We first run a micro-simulation model for personal income tax. This means that the final withholding tax on incomes from savings and the corporate income tax rate remain unchanged. The results indicate strong adverse effects on income distribution. In a second stage, we use off-model statistical data to simulate the effects of a full flat rate system in which the top marginal personal income tax (PIT) rate, the final withholding tax on interest, and the corporate income tax (CIT) rate are equalized. Base broadening also applies to the taxation of savings and to corporate income tax. Although the strong adverse effect on income distribution remains, the tax burden is shifted from income subject to PIT to income from savings. On the efficiency side, high-income earners enjoy the largest cuts, while the drop in average income tax rates for low-income earners may result in a positive participation effect. The taxation of savings is more neutral under the contemplated tax reform.