belgium and switzerland revenue and expenditure

COMPARATIVE GOVERNMENT REVENUE AND EXPENDITURE

PRACTICES IN BELGIUM AND SWITZERLAND

Legal Memorandum

July 2012

GOVERNMENT REVENUE AND EXPENDITURE PRACTICES IN BELGIUM AND SWITZERLAND

Executive Summary

The purpose of this memorandum is to provide an overview of fiscal

federalism in Belgium and Switzerland. Fiscal federalism refers to the allocation of fiscal responsibilities

between the state and sub-state entities, including tax collection, revenue distribution, and management of public debt. Fiscal federalism seeks to balance the benefits of statewide uniformity and local autonomy. The appropriate balance depends on state circumstances. In Belgium, which has deep linguistic and cultural divisions, state control of taxation provides uniformity and may promote unity. In contrast, Switzerland gives its sub-units significant autonomy over taxation, which leads them to compete for residents and investment.

In Belgium, which has otherwise decentralized rapidly over the past four decades, the state imposes and collects the majority of tax revenue. Because sub-state entities generally control spending, the fiscal system consists largely of transfer mechanisms from the state to smaller units. While the constitution permits the state to equalize income across regions and communities by imposing different tax rates, the state has not exercised this option out of concerns for state unity.

Switzerlands system is rooted in the independence of its local governments (cantons), and therefore gives sub-state entities wide discretion to collect and spend revenue. The constitution does grant the state limited tax powers, an oversight role, and the responsibility to equalize income among cantons. Although they can borrow freely, cantons have adopted a variety of mechanisms to limit their debt.

Government Revenue and Expenditure, July 2012

TABLE OF CONTENTS

Statement of Purpose 1 Introduction 1 Belgium 1 Collection and Distribution of Revenue 2 Role of the State 2 Role of Sub-State Entities 3 Management of Public Debt 4 Switzerland 5 Collection and Distribution of Revenue 5 Role of the State 5 Role of Sub-State Entities 7 Management of Public Debt 8 Conclusion 9 Comparative Chart 10

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COMPARATIVE GOVERNMENT REVENUE AND EXPENDITURE

Statement of Purpose The purpose of this memorandum is to provide an overview of fiscal federalism in Belgium and Switzerland. Introduction

Fiscal federalism refers to the allocation of fiscal responsibilities between the state and sub-state entities. The primary fiscal functions of government are: (1) tax collection; (2) revenue distribution; and (3) the management of public debt. Ideally, fiscal federalism balances the need for statewide uniformity with the benefits of local autonomy and innovation. State control can increase administrative efficiency and promote a sense of unity. On the other hand, local autonomy allows local officials to better serve the specific needs of their communities, and experiment with creative policy solutions that may be too risky to attempt at the state level. Belgium and Switzerland demonstrate the diversity of fiscal federalism arrangements. In Belgium, the state typically sets and collects taxes and transfers most of the revenues to sub-state entities, which determine how the funds are spent. Conversely, the Swiss system gives sub-state units freedom to tax, spend, and incur debt, and the state a mostly supervisory role. Belgium

Over the past four decades, Belgium has devolved power from a highly centralized state to increasingly autonomous sub-state units.1 While the state maintains primary responsibility for tax collection, the territorial regions and linguistic communities have greater authority over spending. The Belgian fiscal system thus consists largely of mechanisms to transfer revenue from the state to the regions and communities. 1 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 2 (2007), available at http://www.wiwi.uni-frankfurt.de/profs/spahn/pdf/publ/6a-065.pdf.


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Collection and Distribution of Revenue Belgium consists of three territorial regions and three linguistic communities.2 Although these sub-state entities have broader spending powers than the state, they rely heavily on state transfers to fund their expenditures.3 The state distributes revenue using tax-sharing arrangements and grants.4 Role of the State

The Belgian state plays a major role in raising revenue but a much smaller role in providing government services. While the state collects over 50% of Belgiums tax revenue, it spends only one-quarter of this money.5 The remainder is distributed to sub-state entities through three mechanisms: (1) personal income tax transfers to regions; (2) value-added tax transfers to communities; and (3) interregional equalization grants.

The state raises revenue by imposing personal and corporate income taxes.6 Personal income tax revenues are redistributed to regions and communities as a fixed-base grant. The grant base was calculated in 1989 and is adjusted annually to reflect inflation and growth.7

The state also collects revenue through a value-added tax (VAT) on

the purchase price of goods.8 Communities receive formula-based transfers from this revenue to finance public education expenditures.9 As with the personal income tax sharing system, VAT distribution was calculated in

2 Ann L. Griffiths, ed., HANDBOOK OF FEDERAL COUNTRIES, Forum of Federations (2005), at 62-63. 3 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 2 (2007). 4 Government at a Glace 2011 Country Note: Belgium, OECD, 1 (2011), available at http://www.oecd.org/dataoecd/60/0/47876144.pdf. 5 Government at a Glace 2011 Country Note: Belgium, OECD, 1 (2011), available at http://www.oecd.org/dataoecd/60/0/47876144.pdf. 6 Elodie Fabre, Belgian Federalism in a Comparative Perspective, VIVES Discussion Paper No.5, CATHOLIC UNIVERSITY OF LEUVEN: FACULTY OF BUSINESS AND ECONOMICS, 14 (2009), available at http://www.econ.kuleuven.be/vives/publicaties/DP/DP2009/Vivesdiscussionpaper5.pdf. 7 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 1 (2007). 8 Elodie Fabre, Belgian Federalism in a Comparative Perspective, VIVES Discussion Paper No.5, CATHOLIC UNIVERSITY OF LEUVEN: FACULTY OF BUSINESS AND ECONOMICS, 14 (2009). 9 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 1 (2007).


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1989 and is periodically adjusted to reflect changes in the cost of education.10 Belgiums constitution allows the state to equalize regional incomes through the redistribution of revenue.11 While this provision permits the state to tax residents of different regions at different rates,12 the state has declined to exercise this power.13 Residents of wealthy Flanders would likely resent paying higher tax rates to subsidize Wallonia, and this could adversely affect unity.14 However, the state annually transfers approximately 2% of state GDP from Flanders and the Brussels-Capital Regions to Wallonia.15

The state also provides equalization grants from the states general budget. The equalization grant is calculated based on the difference between the regions per capita income tax and the state average. For each percentage point of difference, the region receives a fixed amount of money per resident.16 The equalization grant provision is intended to equalize regional revenues,17 but thus far has only succeeded in lessening the disparity.18

10 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 1 (2007). 11 BELGIUM CONST art. 175-178 (1831), available at http://www.dekamer.be/kvvcr/pdf_sections/publications/constitution/grondwetEN.pdf. 12 Elodie Fabre, Belgian Federalism in a Comparative Perspective, VIVES Discussion Paper No.5, CATHOLIC UNIVERSITY OF LEUVEN: FACULTY OF BUSINESS AND ECONOMICS, 14 (2009), available at http://www.econ.kuleuven.be/vives/publicaties/DP/DP2009/Vivesdiscussionpaper5.pdf. 13 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 3 (2007), available at http://www.wiwi.uni-frankfurt.de/profs/spahn/pdf/publ/6a-065.pdf. 14 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 3 (2007). 15

Willi Liebfritz, Fiscal Federalism in Belgium: Main Challenges and Considerations for Reform, OECD, 15 (2009), available at www.oecd.org/eco/workingpapers. 16

Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 14 (2007). 17 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 1 (2007). 18 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 3 (2007).


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Role of Sub-State Entities The constitution gives regions control over economic development

and infrastructure maintenance,19 and gives communities power over cultural issues and many direct social services.20 Both regions and communities rely heavily on state transfers to fund these activities.

Regional revenue consists of transfers from the state and regional

taxes.21 The state transfers income tax revenues and equalization grants to mitigate the income disparity between the regions.22 The regions finance approximately one-third of their expenditures through regional taxes, media license fees, mortgage registration fees, and auto registration fees.23 For administrative convenience, regional taxes are generally collected by the state and returned entirely to the region.24

Community revenue consists almost entirely of state transfers.25

Communities receive three types of transfers: (1) a transfer from personal income tax revenues; (2) a transfer based on VAT revenues; and (3) smaller transfers based on historical agreements (for instance, an agreement defining community shares of the state lottery).26 Management of Public Debt

The state has exclusive authority to incur and manage state debt.27 A region in need of credit may independently borrow from the capital market.28 19 Ann L. Griffiths, ed., HANDBOOK OF FEDERAL COUNTRIES, Forum of Federations (2005), at 62-63. 20 Ann L. Griffiths, ed., HANDBOOK OF FEDERAL COUNTRIES, Forum of Federations (2005), at 62. 21 Organization for Economic Co-operation and Development, Chapter 3: Improving Fiscal Federalism, in ECONOMIC SURVEY OF BELGIUM 59, 65(2009). 22 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 8 (2007). 23 Elodie Fabre, Belgian Federalism in a Comparative Perspective, VIVES Discussion Paper No.5, CATHOLIC UNIVERSITY OF LEUVEN: FACULTY OF BUSINESS AND ECONOMICS, 14 (2009), available at http://www.econ.kuleuven.be/vives/publicaties/DP/DP2009/Vivesdiscussionpaper5.pdf. 24 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 15 (2007). 25 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 8 (2007). 26 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, International Monetary Fund, 8 (2007). 27 Belgian Government Portal, The Federal Governments Powers, available at http://www.belgium.be/en/about_belgium/government/federal_authorities/competence_federal_government/. 28 Paul Bernd Spahn, Intergovernmental Fiscal Relations and Structural Problems of Federalism in Belgium, INTERNATIONAL MONETARY FUND, 8 (2007).


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The state has assumed responsibility for all regional debts incurred prior to 1989, and regional debt incurred since that date constitutes only 6% of Belgiums total debt.29 In general, there is no mechanism to transfer debt between the state and regions.30

Fiscal federalism in Belgium allocates significant responsibilities to the state, which sets tax rates, collects and distributes revenues, and issues grants to promote equality between the regions. While the transfers may impose more administrative costs, the heavy involvement of the state ensures a degree of uniformity across the various sub-state entities. Switzerland

Switzerland is a confederation with symmetrical devolution of powers to its twenty-six cantons. The cantons enjoy all powers not specifically granted to the state by the constitution.31 Consequently, sub-state entities have great autonomy in imposing taxes and distributing revenue, while the state provides oversight and promotes inter-canton equality.

Collection and Distribution of Revenue The Swiss constitution gives a great deal of fiscal autonomy to the

cantons.32 While the state must comply with limits on the type, amount, and purpose of taxes, the cantons have general authority to impose any taxes not exclusively reserved to the state.33 For administrative convenience, municipalities usually collect the majority of taxes set by the state and cantons.

29 Annelore Van Hecke, Balancing Public Debt Division in Belgium: How to Assign (Part of the) Federal Debt to Regions, CENTER FOR ECONOMIC STUDIES, KULEUVEN, 2, (2010), available at http://www.iwh-halle.de/d/start/News/workshops/20110214/pdf/VanHecke.pdf. 30 Annelore Van Hecke, Balancing Public Debt Division in Belgium: How to Assign (Part of the) Federal Debt to Regions, CENTER FOR ECONOMIC STUDIES, KULEUVEN, 2, (2010). 31 SWITZERLAND CONST. art. 3 (1999), available at http://www.servat.unibe.ch/icl/sz00000_.html. 32 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 14, 17-18, (2008), available at http://www.publicfinance.ru/filemanager/files/sean_muller.pdf. 33 SWITZERLAND CONST. art. 128-133 (1999), available at http://www.servat.unibe.ch/icl/sz00000_.html.


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Role of the State The state has authority to impose a limited range of taxes, oversee

cantonal taxes, and promote income equality between the cantons through wealth redistribution. Because cantons have primary taxation powers, state transfers typically do not constitute a large portion of canton revenue.

The constitution constrains state taxation power in four ways. First,

the state may only impose certain types of taxes: (1) personal income tax; (2) corporate profit taxes; (3) withholding tax; (4) value-added tax; (5) customs duties; and (6) traffic excises.34 The state may also set special consumption taxes on certain products, including alcohol and tobacco.35 Second, the constitution requires regular renewal of the states income tax powers every ten years by a majority vote in each house of parliament.36 Consequently, Switzerland is one of very few states without a permanent income tax.37 Third, the constitution restricts tax rates, permitting a maximum state tax rate of 11.5% on personal income and 8.5% on corporate profits.38 Fourth, the constitution directs the use of state tax revenues. For instance, the constitution requires the state to allocate at least 17% of gross tax revenue to the cantons.39 Cantons must also receive 10% of the proceeds from taxes on distilled spirits, and use the funds to combat substance addiction.40 Likewise, 5% of non-earmarked VAT revenues must go to reduce health insurance premiums for low-income citizens (unless another mechanism for doing so is provided by law).41

While its authority to levy taxes is limited by the constitution, the

state oversees certain aspects of cantonal taxation. For instance, the state must work with the cantons to harmonize the law governing tax offenses and litigation.42 The state may also issue regulations to prevent unjustified tax benefits.43

34 SWITZERLAND CONST. art. 130-134 (1999). 35 SWITZERLAND CONST. art. 131 (1999). 36 SWITZERLAND CONST. art. 198, 128.1 (1999). 37 Sean Muller, Fiscal Decentralisation in Switzerland, University of Fribourg Institute of Federalism, 5, (2008), available at http://www.publicfinance.ru/filemanager/files/sean_muller.pdf. 38

SWITZERLAND CONST. art. 128(1) (1999). 39 SWITZERLAND CONST. art. 128.4 (1999). 40 SWITZERLAND CONST. art. 131 (1999), available at http://www.servat.unibe.ch/icl/sz00000_.html. 41 SWITZERLAND CONST. art. 130 (1999). 42 SWITZERLAND CONST. art. 129 (1999). 43 SWITZERLAND CONST. art. 129 (1999).


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The state also promotes income equality between the cantons. To ensure that each canton has necessary resources and to compensate for financial burdens arising from geo-topographical or socio-demographic factors, the state must issue regulations to equalize financial resources and burdens between the cantons. This provision is largely aimed at subsidizing infrastructure projects in mountainous and urban areas.44

Role of Sub-State Entities

Cantons may exercise any taxation power not expressly reserved to the state by the constitution, including taxes on personal property and corporate capital. Cantons may also impose a poll tax, requiring each person to pay a fixed amount (unlike an income tax, which varies from person to person).45 For instance, the Canton of Bern imposes income, corporate, capital gains, inheritance, gift, and sales taxes.46 Cantons may not exercise certain taxation powers reserved for the state, such as the special consumption tax, stamp duty, and withholding tax.47

Communes may impose any taxes over which the state and canton lack exclusive authority.48 In practice, however, most communes simply impose a surcharge on cantonal taxes and receive a portion of cantonal tax revenues.49 The only taxation power reserved exclusively for communes is the commercial tax.50 Additionally, communes and cantons share the power to impose certain small taxes, such as those on entertainment and dog ownership.51

Sub-state tax structures vary widely, and are often designed to lure residents or businesses from other cantons or communes.52 For instance, an 44 Cantonal Tax Autonomy in Switzerland: Trends, challenges, and experiences, UNIVERSIDAD CARLOS III DE MADRID, 9 (2010). 45 SWITZERLAND CONST. art. 128, (1999). 46 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 5 (2008). 47 SWITZERLAND CONST. art. 134 (1999), available at http://www.servat.unibe.ch/icl/sz00000_.html. 48 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 6 (2008). 49 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 17, (2008). 50 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 14 (2008). 51 Sean Muller, Fiscal Decentralisation in Switzerland, UNIVERSITY OF FRIBOURG INSTITUTE OF FEDERALISM, 14 (2008). 52 Cantonal Tax Autonomy in Switzerland: Trends, challenges, and experiences, UNIVERSIDAD CARLOS III DE MADRID, 1 (2010), available at http://www.fabriziogilardi.org/resources/papers/gilardi_kuebler_wasserfallen_final.pdf.


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annual income of 100,000 Swiss francs would be taxed at a rate of 9.37% in the Canton of Neuchatel, but only 2.64% in the Canton of Zug.53 Despite these large discrepancies, cantonal tax autonomy is seen as an integral part of the Swiss system.54

Management of Public Debt The state has sole responsibility for managing state debt.55 In

response to the rising deficits of the 1990s,56 a 2001 constitutional amendment requires the state to maintain a balanced budget unless parliament determines that exceptional circumstances justify deficit spending.57

Cantons may also borrow freely,58 and have established risk

management mechanisms to control their debt. Several cantons have adopted balanced budget laws similar to the 2001 constitutional amendment.59 Other cantons have adopted a mandatory or optional system of referenda that allow citizens to stop spending proposals. In cantons with mandatory referenda, all projects that exceed a specified cost must be approved by a majority vote in a popular referendum.60 In cantons with optional referenda, citizens may petition to force a public referendum on

53 Cantonal Tax Autonomy in Switzerland: Trends, challenges, and experiences, UNIVERSIDAD CARLOS III DE MADRID, 6 (2010). 54 Cantonal Tax Autonomy in Switzerland: Trends, challenges, and experiences, UNIVERSIDAD CARLOS III DE MADRID, 7 (2010). 55 SWITZERLAND CONST. art. 128 (1999). 56 Lars P. Feld, Gebhard Kirchgassner, and Christoph A. Schaltegger, Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments, CESifo Working Paper No. 1087, (2003), available at http://www.cesifo-group.de/portal/pls/portal/docs/1/1189478.PDF. 57 SWITZERLAND CONST. art. 126 (amend. 20011999). 58 Gebhard Kirchgssner and Prabhu Guptara, Sustainable Public Finances with Sub-Federal Fiscal Autonomy: The Case of Switzerland, 2 available at http://www.forumfed.org/libdocs/Global_Dialogue/Booklet_4/BL4-C11-ch-KirchgassnerGuptara-en.htm. 59 Lars P. Feld, Gebhard Kirchgassner, and Christoph A. Schaltegger, Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments, CESifo Working Paper No. 1087, (2003). 60

Lars P. Feld, Gebhard Kirchgassner, and Christoph A. Schaltegger, Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments, CESifo Working Paper No. 1087, (2003), available at http://www.cesifo-group.de/portal/pls/portal/docs/1/1189478.PDF.


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spending proposals.61 Due in part to such obstacles, Swiss cantons have low levels of debt.62

Fiscal federalism in Switzerland places great emphasis on the

autonomy of sub-state entities, which in turn compete for taxpayers. While the cantons dominate Swiss fiscal policy making, the state plays a strong role in oversight and equalization of incomes. Conclusion The Belgian and Swiss approaches to fiscal federalism reflect their histories and circumstances. In culturally divided Belgium, a uniform tax regime minimizes regional competition for investment and residents. Because the sub-state entities generally control spending, Belgium has established complex system of revenue transfers from the state to local governments. In contrast, Switzerland has a tradition of local fiscal autonomy and tax competition. In both Belgium and Switzerland, the state plays an important role in promoting equality among the sub-state entities, and has exclusive responsibility for managing state debt.

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Lars P. Feld, Gebhard Kirchgassner, and Christoph A. Schaltegger, Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments, CESifo Working Paper No. 1087, (2003), available at http://www.cesifo-group.de/portal/pls/portal/docs/1/1189478.PDF. 62 Lars P. Feld, Gebhard Kirchgassner, and Christoph A. Schaltegger, Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments, CESifo Working Paper No. 1087, (2003).

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Comparative Chart Revenue Collection and Distribution in Belgium and Switzerland Primary

Power to set taxes

Power to

collect taxes

Actually collects taxes

Responsibility for balancing

prosperity between regions

Responsibility for State Debt

Main Source of Income for Sub-

State Entities

Belgium State (regions and local limited)

State State State State State tax transfers

Switzerland Cantons (state limited, local delegated from cantons)

Cantons Local State State Own tax collection

belgium and switzerland revenue and expenditure

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