A CAPITAL TAXATION IN BELGIUM ?
As the crisis is gradually becoming more diffused, the balance in the budget issue takes a worrying turn. During the first months of the seism, the budget deficit seemed only to be temporary. However, today we know that things are much worse. Clearly much worse for the deficit is structural.
The crisis has only served to reveal the immense public debts inherited from the seventies, increased with the explosion of health and pension expenses. For decades, the country has been buying itself years of immobilism, requiring credit from the next generations.
The public debt of former decades has never been reimbursed. It has been alleviated by an exchange rate decrease and an artificial economic growth, the latter being created by the godsend effect of the euro. The “snowball effect” has been dismissed by a budget balance policy. However, at the same time, instead of reducing federal debts in absolute terms, i.e. in euros, governments limited themselves to reducing it in relative terms, i.e. with respect to the GDP.
From the moment that the wave of the ageing population costs submerges public finances, the reimbursement of this debt will be levied at the price of generational tension risks. However, there is nothing that says that the following generations will be able to pay our debts. There is a risk (a very serious one) that the future generations will not be willing to serve as adjustment variables for the pensions of those that preceded them. This could even lead to generational uncoupling.
With this overwhelming reality in mind, the solution is intuitive: state weight in economy should be reduced. However, this is not that simple. Firstly, since few of us are aware of the public goods that we enjoy. Politically, it is also delicate. However, and most importantly, our communities have opted for a social equation that assigns an important role to the States, especially during crises periods. Assuming that States are too imposing brings us back to the issue of social repartition. However, in this domain, it is only collective choices that are pertinent.
The question that currently comes to mind is to know which fiscal orientations the Kingdom will adopt. The manoeuvring margin of our governments is obviously very small; for any kind of approach needs to be harmonious to the tax systems of adjacent countries, which besides are our foremost commercial partners. A labour taxation increase, aggravating an already worrying situation, would imply that Belgium renounces all hope to climb back up the competitive ladder.
It’s at this level that some recommend capital taxation or gains on shares. Capital taxation consists in capturing the capital accumulated by physical persons. This would, of course, be purely choosing for double taxation, completely opposed to recent political affirmations aiming at attracting and transmitting capital (DLU, the lowering of inheritance and gift taxes and the promotion of pension plans).
This would once again weaken savings, which have nevertheless already been weakened by the financial crisis. This could even lead to serious concern amongst the population, that would lose confidence in deferred capitals (pension and similar savings), which are in fact supposed to complete pension liabilities, the financing of which is becoming increasingly more fragile. Savings taxation could thus become extremely counter-productive. This could even lead, as our former Prime Minister Herman Van Rompuy stressed often, to the so-called Pareto paradox. According to the latter, the population starts saving when it feels that taxes will be increased. This paradox is schizophrenic if the taxation only hits savings. Besides, it could be worse: capital taxation would inevitably lead to the question of its protection against inflation, now inevitable.
Therefore, some are thinking of taxing capital gains on shares. It doesn’t really matter that dividend taxation has already been increased several months ago (increase of withholding taxes, OPA, capital gains taxation at ISOC, etc.): it’s now that re-taxing should be carried out!
However, the answer to capital gains taxation should be founded on the founding principles of the Belgian tax system. All companies are, directly or indirectly, held by a physical person, for there inevitably comes a moment where company benefits reach the assets of a physical person, i.e. where the distribution chain is completed. A company does not exist for itself: it makes up an economically abstract being.
Furthermore, company benefits are submitted to double taxation, i.e. company taxes and, in case of dividend distribution, withholding taxes.
This reality explains why capital gains on shares are not being taxed. When a shareholder achieves capital gains, the latter do not change the collective assets of the company, but transfer part of it towards another shareholder. In other words, capital gain exemption does not erase a taxable good, but replaces it sideways and perfectly towards another taxpayer. Indeed, the observed capital gains on shares make up, by transitivity, past or future company benefits. These benefits have or will be hit themselves by company taxes. In other words, capital gains on shares would come with a double taxation of company benefits and would, in case of inflation, lead to capital purchasing power taxation.
Some will argue that some capital gains are speculative, thus circumstantial and will lend themselves more naturally for specific taxation. Nevertheless, we should be cautious. One such an orientation would demand the precision of the speculative character of equity transactions based on codified elements that still need to be defined. Moreover, other essential questions come to mind: would capital gain taxation lead to the taxation of the achieved or merely of the expressed capital gains? Would capital losses be deductible? And if so, following which metrics? Who would keep the records of these capital losses and gains? What would be of non-listed titles and foreign societies, in view of currency effects? How would an OPA be considered?
To conclude, capital of capital gain taxation seems to be an efficient idea. But it is more incantatory than operational, for it would hinder the whole Belgian tax system, aggravating productive investment taxation. The risk of this type of measure is nevertheless not inasmuch the capital flight but the denial of the business spirit, nevertheless already poor in our country. The risk is, indeed, the canalisation of Belgian savings towards the only long-term investments without capital gains, i.e. State notes. The State would thus divert the savings towards state investments rather than stimulating business risks. We would advise to conserve the logic that has already being used for 50 years in our country: taxing the return on capital rather than the capital itself or the capital gains on shares.
