Thursday, January 7, 2010

Tax evasion - in Belgium!

Being based in Belgium and soon-to-be subject to my first tax return, I've been doing some informal investigations on people's tax practices. Perhaps as background, I should add here that both in my PhD thesis and in my role as a development consultant in Mozambique, a considerable part of my time was spent analysing issues relating to tax policy and the private sector response. The big issues are fairly well known - whether or not the Laffer Curve can genuinely be found is an open question, but there is little disagreement that the higher the tax rate, the more the incentive for people and firms to avoid paying taxes. This of course must be balanced against the probability of being caught evading, the size of the penalty, and in many countries such as Mozambique, the likelihood of actually being formally punished if caught - that is, the probability of a bribe being sufficient to make the problem disappear. Working on firm surveys in Mozambique and generally interviewing folk with something to say on the matter gives all sorts of insights about false invoicing, misrecording of goods to lower tax categories, false sales declarations, cash transactions, hidden bank accounts etc.

Now, back to Belgium. Having asked around a bit it turns out that the high marginal tax rate in Belgium (50% on incomes over something like €35,000, albeit with an allowance of €7,000 and allowances for business-related expenditures) leads to pretty similar behaviour. I'm pretty sure the bribes are small, but from what I hear, asking an electronics shop to change the receipt for your flat-screen TV to read "computer screen" seems to be accepted and carried out. Anyone able to carry out any work for cash does so, which includes doctors(!) and can also include house sales (if you lower the sale value of the house, agent and seller get to split the difference!). As for secret bank accounts, there's little more to say.

I even went and looked on the IMF website to see if anyone had studied tax policy in Belgium and perhaps noticed that evasion/avoidance is rife (unless for some reason I have a particularly unusual bunch of aquiantances). That this might be related to a 50 percent marginal tax rate might also be worth acting on! Fair enough if you want to make 50 percent your top rate for incomes over €150,000 (I think in the UK it's £150,000), but over €30,000!! There must be some study of this that I just haven,t come across yet... In any case, this must be bad for the efficiency of the Belgian economy which, let's face it, could do with some additional job creation given the high levels of unemployment which are further increasing at the moment (outside Brussels at any rate...).

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