The Belgian VAT rate structure in need of reform

This note focusses mainly on the VAT rate structure in Belgium and identifies channels for potential efficiency and revenue gains. We compare the Belgian VAT rate structure with that of other Member States, in particular neighbouring countries where cross-border shopping effects could potentially arise. We find that the extensive application of reduced rates and the use of exemptions considerably impact the revenue efficiency of the VAT system and carry a large budgetary cost (roughly 2.3% of GDP). We also take a close look at the rationale used to justify the various reduced rates for specific categories of goods and services and find that reduced VAT rates may not be the best tool to achieve desired policy goals. We also find that there are strong arguments for having a simple and uniform VAT system, with a limited use of reduced rates. Finally, we suggest a number of ways to improve the efficiency of the VAT rate structure in Belgium, which could help finance a shift in the tax burden away from labour.