Wealth Inequality Debate Rages in Belgium

Wealth Inequality Debate Rages in Belgium

That right there, my dear readers, is the Belgian stock exchange, currently home to the Euronext Brussels. In front of its 150-year-old building you see a 120.000 people-strong labour demonstration, probably one of the biggest in post-war Belgium. Since my office is right around the corner I decided to take a sneak peek during lunch. Not liking the grim atmosphere, I hastily returned though. That was one malcontent mob, I tell you!

Violent Riots in Brussels on November 6, 2014About two hours later things went south, with some protestors turning to violence to cool off their anger. When Belgium makes the frontpage of the BBC for something different than a beer award, you know shit really hit the fan. How is it that violent acts like the ones reported by the BBC happen in one of the most advanced, progressive and socially equal countries in the entire world?

In my opinion, it all boils down to a growing sense of inequality, fueled by austerity measures of the new right-wing federal and regional governments.

 

Government measures

Following the elections for both the federal and regional parliaments in May of this year, right-wing parties strongly gained on their leftist counterparts with a story of policy change, tax pressure reduction and more economic growth. Forward three to four months and we’re finally finishing up our government formations. As it turns out, the new legislative proposals by the right are strongly aimed at reducing government spending and with that quite a lot of public services.

Without going into detail, it’s clear that most households stand to lose more than they gain. It’s true that government spending will go down, but because of our 3% budgetary deficit the spending reduction did not result into less taxes. On top of that, the often promised tax shift from a focus on income taxes to eco-taxation, consumption taxes, and taxes on (large) capital didn’t materialize.

Shocker!

Couple the above with our already legendary high tax rate on income, with a higher retirement age, and with a freeze to the automatic link between wages and inflation, one of the cornerstones of the left movement, and you know most hard-working Belgians won’t be too happy.

 

Income and wealth inequality

One of the reasons why I like the OECD is its extensive database full of interesting statistics – who doesn’t love big data? My favourite part of the OECD website deals with income and wealth distribution, for which the OECD uses the Gini coefficient. This ratio represents the income distribution of a nation’s residents.

As it happens, Belgium has one of the lowest Gini coefficients, which means income is quite evenly distributed among all social classes. Only the Scandinavian countries and two Eastern European countries have a lower income inequality.

Of course, income inequality doesn’t tell us anything about wealth inequality. It’s not because you earn a lot of money that you also own a lot of money – a trap which many high-earners fall for when they succumb to lifestyle inflation. Sadly, it’s much harder to find data on wealth distribution in Belgium, but it’s safe to say there are some mightily wealthy people among us Belgians.

Even if there was good data on wealth inequality, it wouldn’t matter. In my view, the growing sense of inequality in general is enough to have everyone on edge and spur public discontent among the ‘have nots’. When one group feels like it is over-contributing to our social welfare, that’s a major problem.

 

The cry for equal contribution to our social welfare model

What these people want is very simple: everyone should chip in to their own ability. To be more specific, a large group of Belgians want wealthy citizens to contribute more based on their wealth or capital, rather than on their earnings from labour. When considering that income from capital is taxed at 25% and capital gains aren’t taxed at all, that sounds like a fair question to ask.

What drives me crazy though, is the vocabulary used to denote different tax regimes. It seems like nobody knows the difference between taxes on capital and property, capital gains taxes, taxes on income from capital like dividends, or taxes on specific kinds of asset classes.

Obviously, language confusion makes having a healthy debate difficult.

 

My proposal

Because I’m trying to reach financial independence sooner rather than later, I’m of course following this debate argus-eyed. As a rather high-income earner with hardly any assets, I’ll probably move to a no-income earner with many assets in the future, so the advantages and disadvantages of a tax shift are quite clear to me.

The debate on whether we should introduce a certain kind of “tax on the wealthy” is entirely mute without considering the big picture. Therefore, I’d like to propose a complete rethinking of taxation, which includes all types of wealth creation and spending. To me it doesn’t make any sense to treat income from capital differently than income from labour. New income is income, period. You could even add capital gains in the mix since they could be considered income as well.

We should furthermore rethink consumption taxes with a focus on ecologically sustainable services and products. Does it make sense to apply a higher tax rate to a Diesel guzzling SUV than to a very efficient small European car? Yes, it absolutely does. Not only can I defend this standpoint from an environmental perspective, it also turns consumption taxes into a tool for social redistribution.

It would be refreshing to see someone propose a tax system like the one I describe above. One in which all income is combined and subjected to the same progressive tax rate. One in which not only government spending and income taxes are viewed as a way to increase social equality, but also uses other forms of taxation to achieve a more equal society.

In the long-run, such a system would reduce not only income inequality, but also wealth inequality, whereas our current welfare state has limitless potential for wealth accumulation, resulting in the grievances recently seen in Brussels. Even in my proposal wealth can accumulate until the end of time, but it does so at a much more societally desireable pace.

 

It took me a really long time to find the right words and write down my point of view on the debate that’s raging over here. I’d love to hear your opinion on wealth and income distribution with regards to social welfare states. Open dialogue is the only true standard of a democracy, so please try and convince me of your standpoint.

24 Comments

  1. Interesting read, thanks a lot. Even more interesting that you do not recognize the riots if you are living in Germany which is right next door. 😉
    I have to state it once again I hate the quasi governmental TV / Radio stations here in Germany as much as the way of financing them.
    To your point. Personally I do not like the idea of taxes on capital gains / dividend income etc since the money which allowed me to purchase the shares has already taxed once. The money transferred to me via dividend also has been taxed once (as profit of my / the company). Then we are talking about not one time, not two times but three times of taxation. When do you want to stop counting? Exactly when nothing is left. If you want to have taxes on every income what about heritage? Think about your parents little house in the local suburb. They have saved so much money during their lives, they as well as you had only short vacations abroad since your parents wanted to pay of their debs. Now you want to pay taxes on the heritage? What about your neighbor who was renting the house next to you spent all his money on vacations, girls and cars?
    Now please think about who was living the better life for the Belgium society and who contributed more for the long run.

    Just my two cents but as less state as possible but a strong state. Don’t get me wrong you, I and all the cooperations should pay their taxes as required without loopholes like Ireland, Luxembourg, Caiman Islands etc but working, saving, investing and thinking about the future should give me benefits above the stupid once.

    1. Hey Lars, the money that allowed you to buy the shares has been taxed before. If you would keep it in a sock under your bed, there will be no additional taxes. But when you buy a share, the money starts working, and that generates income and thus taxes. If after that, the shares is worth more, that is income as well. Why not taxing it…? Why is some form of income more taxable than another? Not everybody has the opportunity to get a big income out of investing, most have to work for their living… It only seems fair that all is treated similar

      And heritage: it should be taxed as well, and it is in Belgium. Some parts are almost tax free, so that the little suburb house can go to the kids… And the guy that rented and wasted all on vacation and girls… well, not sure he had a better life:depends on what a good life is. I am sure the parents with the house had a holiday as well…

      To return to NMW: Indeed, a more fair tax on all forms of income sounds great to me. The time I spend in working and the money I get will be taxed less. On the downside, The money I make out of investing will be taxed more… Question is: where to put the right balance? I have no idea.
      But it also opens the door to link social advantages not only to your work income but to your whole income. Belgium is a country where you can earn officially almost nothing, get social support and on the side rent out a house or 3/4 or own a firm that pays mega dividend but still be considered low income.(Ok, I push it to the limit, but you get the idea)

      So, indeed, new income is income. I follow you on the proposal.

      1. Belegger,

        I follow your line of reasoning: when money generates new money, the newly created wealth should be taxed the same way as other types of income.

        What most people don’t seem to realize is indeed the fact that their income from labour will be taxed less when a tax on capital gains is introduced. It’s not like our tax pressure increases yet again.

        Linking taxation to social corrections is essential if we want our social welfare to continue being to so great over the next couple of decades.

        Thank you for contributing your point of view!

        Best wishes,
        NMW

    2. Lars,

      Thank you for your contribution. You point out some things that people often mention over here too, especially taxing the same type of income twice or even thrice.

      I completely agree with you that money never should be taxed twice, so that’s why in my proposal only new income is taxed. As a matter of fact, I’m dead set against a property tax (like they have in the Netherlands for example). When your shares generate new wealth, either in the form of dividends or capital gains, I believe it’s fair to tax that newly created wealth – and only the new wealth.

      With regards to inheritance, I understand why you don’t want the state to tax your parents’ stuff when you inherit it. Funny thing is, though, that inheritance laws were first put into place to restrict the ever growing wealth of nobility as properties and assets moved from generation to generation. Taxing inherited assets is an excellent way to redistribute wealth from one generation to the next.

      The big problem today is that it’s quite easy to circumvent those inheritance taxes by either putting your assets in a holding company (like so many rich families in Belgium do), or by giving the assets to your children before you die (which is also a popular way of doing it). As you can see, I’m still not entirely sure on my standpoint.

      Totally agree with tax sheltering! The problem mostly is that it’s impossible for one single nation – especially the size of Belgium – to solve a puzzle like that. It’ll take an EU-wide approach to close loopholes like the Double Irish and Luxembourg incentives.

      Best wishes,
      NMW

      1. Understood understood,
        totally agree on the fact that a single country solve the international taxation issues / loopholes but I am quite sure we need all countries to working together on that. Capital is much more moveable than properties or labour. Which is why they are taxed more, at least here in Germany.
        Good thing in Germany is that you cannot move your assets to a holding which only helps you. “Tax free” holdings are supposed to support broader social aid programs and stuff like that. This is why rich people move their assets into holdings in Luxembourg, Switzerland, Austria etc.

        ….

      2. “Funny thing is, though, that inheritance laws were first put into place to restrict the ever growing wealth of nobility as properties and assets moved from generation to generation.”

        This is actually bit of a myth. Most wealth is lost by the third generation without inheritance tax .

          1. Sure. Have a look at this

            Where are all the Billionaires? & Why should We Care?: Victor Haghani at TEDxSPShttp://www.youtube.com/watch?v=1yJWABvUXiU

  2. Same thing here in The Netherlands. All of a sudden Piketty is all the rage, while the guy didn’t even include our country in his research. As a future FI-er I’m not too happy about this whole higher taxes on capital either. We’re already paying 52% taxes on a part of our income. Why tax us even more when we decide not to spend everything that’s left after taxes? Our 1.2% wealth tax a year is high enough as it is…

    1. Econowiser,

      Funny that you mention Piketty. The subject of my post does indeed strongly correlate with the premise of his book. I actually started reading that yesterday evening.

      I understand that the Dutch government already introduced a property tax of 1.2% yearly. Such a system is outrageous to me because at current interest rates a lot of people are actively losing money to inflation and taxation. Furthermore, I don’t think we should tax capital multiple times.

      The upside to introducing capital gains taxes though, would be that the tax on your income would significantly go down. Also, I believe you can also recouperate most taxes on dividends through your tax sheet at the end of the year?

      Cheers,
      NMW

  3. a small story distributed by the Canadian Federation of Independent Business a number of years ago

    Once upon a time there was a Little Red Rooster who scratched about and uncovered some grains of wheat. After calling the barnyard neighbours, the Little Red Rooster said: “If we work together planting this wheat, we will have bread to eat. Who will help plant the wheat?”

    “Not I,” said the Horse. “Not I,” said the Goat. “Then I will,” said the Rooster.

    After the wheat started growing, the ground turned dry. “Who will help me water the wheat?” said the Rooster.

    “Not I,” said the Horse. “I’d lose my workers’ compensation,” said the Sheep. “I’d lose my overtime entitlement,” said the Goat. “Then I will,” said the Rooster.

    The wheat grew and ripened into golden grain. “Who will help me reap the wheat?” asked the Little Red Rooster.

    “I’m waiting for a guaranteed annual wage,” said the Goat. “Out of my classification said the Sheep. “Then I will,” said the Rooster.

    When it came time to grind the flour, “Not I,” said the Horse. “I’d lose my unemployment insurance,” said the Chicken.

    Then it came time to bake the bread. “That’s overtime for me,” said the Horse. “I left school and never learned how,” said the Goat.

    “I’d lose my welfare benefits,” said the Sheep.

    “Then I will,” said the Rooster. Five loaves of bread were baked and the Rooster held them up for all the neighbours to see.

    “I want some,” said the Horse. “I want some,” said the Chicken. “I want some,” said the Sheep.

    “I demand my share,” said the Goat.

    “No,” said the Rooster. “I can rest for awhile and eat five loaves myself.”

    “Excess profits,” cried the Horse. “Capitalist leech,” screeched the Chicken. “Company fink,” grunted the Sheep. “Employer domination,” screamed the Goat. And they hurriedly painted picket signs and marched around the Rooster, singing, “We shall overcome.” And they did.

    For when the Farmer came to investigate the commotion, the Little Red Rooster was told, “You must not be greedy. Look at the oppressed Horse. Look at the disadvantaged Chicken. Look at the underprivileged Sheep. Look at the less fortunate Goat. You are guilty of making second class citizens of them.”

    “But-but I earned the bread,” protested the Little Red Rooster.

    “Exactly,” the wise Farmer said. “That is the wonderful free enterprise system; anybody in the barnyard can earn as much as they want. You should be happy to have all this freedom. In other barnyards, you would have to give all your loaves to the Farmer. Here you give four loaves to your suffering neighbours.”

    And they lived happily ever after. Including the Rooster, who crowed, “I am grateful.”

    But the Little Red Rooster’s neighbours wondered why no more bread was baked.

    1. Gcai,

      Fun story! Although, I’m not sure what your angle is. 🙂 Sounds like a communist nation!

      I agree that those who put in the most effort should be rewarded for it (to a certain degree), but that doesn’t really apply when you’re talking about capital generating new income?

      Best wishes,
      NMW

    1. Henry,

      It’s true that their are quite a lot of problems, but a lot of them are overblown or used to further certain political or private agendas. The truth is that Belgium has withstood both the financial and economical crises remarkable well, yet some have us believe that we’ll be living hell on earth in a couple of years.

      The unemployment is quite high currently, that’s true (although historically it’s been much higher than in the US). Especially in Southern Europe there are major problems with youth unemployment, which will drag that generation down for years to come.

      Cheers,
      NMW

    1. FRD,

      You’re right that our tax system is just too complicated. That’s why I propose a progressive tax on all forms of income, no exceptions. The trouble is that everyone wants to make sure they get the best out of it, which leads to exceptions on top of exceptions.

      What do you mean by a 25% tax rate on all types of income? A flat rate on both labour income, capital gains, dividends and interest?

      Cheers,
      NMW

      1. yes I would apply 25% tax on all “realised” income whether that comes from rental income/labour/lottery-gains/dividends/capital gains(when the stock is sold)

        I’m not in favor of the system they’ve implemented in The Netherlands and I really hope we don’t go down that road. i.e. A system where they tax you on “assumed” returns.

        In other words: I’m not in favor of a capital tax but a capital-gains-tax would be ok if other tax brackets are lowered and they discontinue other tax benefits

        I’m pretty sure if I’m taxed 25% on all income I would be FI way faster. After that I wouldn’t mind to keep contributing 25% of my passive income to society in order to sustain our health care system etc

        One thing that stays on my mind is that higher wages for consumers will just lead to higher consumption and corresponding prices so in the end the overall Belgian won’t benefit as much I think.

  4. In my eyes the biggest problem is that the Belgian governments are woefully inefficient, we don’t need more taxes but big cuts in spending.

    I also think that one of the driving forces behind these strikes is the fact that the left-wing (particularly the PS) is no longer in control for the first time since 1988. They’re pissed their hand is no longer allowed to touch the cookie jar so they’re doing everything they can to make this centrist/right-wing government fall. Pretty weird to me that the left-wing parties, as well as the left-wing of CD&V, are suddenly pushing so hard for more taxes on wealth considering they’ve been in power for many years before the current government.

    Hopefully, we’ll be spared from more wealth taxes. To collect a significant amount of money, a tax needs to target as many people as possible. Those who have the means to do so can always find other ways to pay less taxes, LuxLeaks is a great example of this. Ultimately, the burden of this tax will fall to the middle-class and perhaps even lower class, which are already taxed to death with heavy taxes on labor, consumption as well as wealth.

    1. ThomasDV,

      I wholeheartedly disagree that (all) Belgian governments are inefficient. 🙂 It’s true that there is room to optimize and decrease spending, but not without downsizing the current level of public services. I think you’d be amazed to see how efficient some departments are run.

      I do, however, agree that we don’t need more taxes. You’ll find in my post above that I talked about a shift, so that means increased government income from one source offsets the income from another source. Capital gains taxes can offset taxes on income from labour, for example.

      Obviously left-wing parties have stronger ties to the trade unions, but I think it’s a bit too easy to put it on those political groups. Everywhere around me I hear people being unhappy with the proposed solutions (most of them don’t even like the trade unions). The biggest mistake the current government made was not addressing the social partners first, which is the result of both inexperience and ideology of some of the coalition parties.

      The Christian-democrats have also been in favour of capital gains taxes for much longer than the past legislature. Never forget that the past three to four legislatures were born out of necessity and damage control. Before 2008 the liberals were always a large part of government (not CD&V!), which makes introducing taxes on large capital difficult, especially when the economy is doing so well.

      You’re absolutely right that taxes need to target the intended group of people, no exceptions. From your reply I get the feeling that you have accepted that some people will get away with tax circumvention. That’s no reason to not try and change the rules of the game. With the same problems arising in many other European countries, it’s highly likely that a consensus will emerge at the EU level, which would make international tax circumvention much more difficult.

      Thank you for your contribution!
      NMW

  5. Dear all, it would seem very fair to tax new income from capital at the same rate as income from labour, but in my opinion it is not. Compare the risk you run as an investor to the risk one runs as an employee. The risk any investor runs loosing his capital is vastly larger than the financial risk an employee runs loosing his job. Moreover, generally speaking salaries always go up and are, in Belgium indexed such that the purchasing power remains the same. Dividends never go only one way (up) and quite often simply disappear. It is normal and just that the investor is rewarded for taking that risk, by having a larger return on capital compared to return on labour. The next argument may not strike you as relevant, but all wage earners should realise that it is ONLY thanks to people who have put their money at risk of eventually loosing everything that they have an income at all. It are ONLY investors that create jobs. Forget about governments as job creators. They only create the environment in which the risk takers eventually take the plunge and as re-distributors of the wealth the investors have created. In case the company goes belly-up, the workers are rescued, but the investor never.

    1. Ekkehard,

      You touch upon a couple of good points, but present them rather black and white, in my opinion.

      From the perspective of the person investing is or their capital they’re taking on a big risk by investing it, but in the larger framework it’s not a huge risk at all. It’s just excess money they’re trying to get a return on – some exceptions like start-up funds and hedge funds not withstanding. To me, having a single source of income (your job) is a much larger social risk. Emphasis on social.

      Lose you’re job and you lose everything, lose money on an investment and you only lost that bit of money you weren’t planning to use for anything else anyway.

      So in that sense I think it would be desireable from a social perspective to change the way we currently tax income from labour and capital differently. Of course, this hardly has anything to do with “the logics of the market”, but more with political viewpoints and thinking.

      An even better solution would be to not tax income at all, but introduce a progressive tax system on goods and services purchased that takes into account social desireability and ecological effects (spillover and externalities). However, that would need a EU wide change, which is unlikely to happen anytime soon.

      Best wishes,
      NMW

      1. People who lose their jobs do not lose everything. Generally speaking people find new jobs. Capital lost in a failed venture is gone forever. Further more workers are buffered from job by social welfare, but that isn’t really the case with investment capital. A lof of this investment money is keeping pensions going arguable far more vulnerable than workers.

        1. Bealoideas,

          You’re right for most people, but there’s an increasing group of people who can’t bounce back from a job loss because of social or even societal reasons. Furthermore, I wouldn’t wish anyone to be on social welfare for longer periods of time. Yes you can live on it, but your quality of life isn’t the best and the social stigma remains.

          You can diversify your investments easily, you can’t diversify your job. Unless you’re a freelancer or self-employed of course, but let’s be honest, those aren’t the kind of people who are likely to lose their job. The chance that you “lose it all” with investments is far less likely than with just one job.

          Cheers,
          NMW

Leave a Reply to No More Waffles Cancel reply