Economic impacts of tax-shifting operations [ Article 2009122102 - 21/12/2009]

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This study is devoted to the analysis of the main effects on the Belgian economy, for the period 2010-2020, of various forms of tax-shifting aimed at increasing taxes on energy and, simultaneously, decreasing other forms of taxation. All these variants have been simulated using the FPB’s medium-term model for Belgian economy (HERMES).

As far as the increase in energy taxes is concerned, five modalities have been considered: the first one involves setting Belgian energy prices (all taxes included) at equal to the average of energy prices observed in the neighbouring countries (Germany, France and the Netherlands); in the second one the Belgian level of taxes on energy is set at equal to the average level of taxes on energy of our three neighbours. In the third modality, Belgian energy prices reach, progressively (in 2 years’ time), the average prices of three Nordic countries (Denmark, Finland and Sweden), which are amongst the countries that levy the heaviest taxes on energy. The fourth, very ambitious, modality supposes that Belgian energy prices are progressively aligned to the level of Danish energy prices. The fifth modality considers the implementation of a carbon tax.

All in all, in 2012, the average energy price would increase by a minimum of 3.5% to a maximum of 27.6%, depending on the modalities that are considered. These energy price increases imply additional public revenue, which would reach, in 2012, a minimum of 0.24% of GDP and a maximum of 2.24% of GDP.

The additional public revenue is entirely used to reduce other taxes. Budgetary neutrality is indeed respected ex ante in the present study, but not necessarily ex post because of the feedback effects of the recycling measures. Four recycling measures are considered: a general reduction in employers’ social security contributions, a cut in employers’ social security contributions targeted on low-wage jobs, a reduction in both employers’ and employees’ contributions and, finally, a decrease in personal income tax paid by households and in corporate tax paid by firms.

Tax-shifting operations tested in this study generally have little or no impact on GDP growth: the negative impacts resulting from the energy tax increases are balanced by the positive impacts from the decrease in other taxes. On the other hand, all the tax-shifting operations considered allow a decrease in energy consumption and in CO2 emissions.

Results are, however, more contrasted as far as employment is concerned: some tax-shifting operations - mainly those involving a reduction in (targeted) employers’ social security contributions - allow the creation of additional jobs; while some others result in fewer jobs than in the baseline scenario.

Regarding public finances, budgetary surpluses generally emerge ex post when the recycling mode consists of lowering employers’ and employees’ social security contributions (due to job creations and to the positive impact of this recycling mode on public costs). When the additional taxes are recycled in a decrease in personal income tax and in corporate tax, however, the situation of the public balance is generally worse than in the baseline scenario, mainly because of job destructions and the higher inflation resulting from this recycling mode.

A so-called “double dividend” (increase in employment and decrease in CO2 emissions) could therefore be reached in several cases, particularly when higher energy taxation is combined with a cut in taxes on labour.