In the latest edition of the Business Barometer, a collaboration between Dinheiro Vivo and The Lisbon MBA, our alumnus Pedro José, partner at Conceito, provides insights on the alumni survey results concerning taxation dynamics.
In this first quarter of 2024, an important change occurred in the composition of the Portuguese parliament after the legislative elections that took place on March 10. The results show a shift towards a right-wing parliament with a minority government led by Prime Minister Luís Montenegro.
It is important to highlight that the Bank of Portugal (BdP) updated its projections for 2024 on March 25, forecasting GDP growth of only 2%, inflation at 2.4% (close to the ECB’s target of 2%), and the unemployment rate remaining unchanged at 6.5% compared to the previous year.
As the Portuguese economy is a small open economy, it implies that moments of uncertainty, such as the ones we are currently experiencing, are particularly keenly felt. Currently, the war in Ukraine remains at a stalemate with no clear outcome and consequences for Europe. Additionally, the Israeli offensive in Gaza against Hamas could escalate into a regional war following Iran’s unprecedented attack on Israel and Israel’s subsequent response. Finally, the US presidential elections pitting Joe Biden against Donald Trump could be decisive later in the year. Unfortunately, polls do not indicate who will win the upcoming US presidential elections. This exacerbates uncertainty in the markets and brings concerns, especially to NATO, notably to the European countries that are part of it.
Given that Portugal is part of the Eurozone, it depends on the ECB in terms of monetary policy. Thus, taxes are a critical instrument for achieving the political, social, and economic objectives set by the government.
The Lisbon MBA conducted a survey of its alumni with 196 responses, mainly about taxation in Portugal. It is relevant to note that the majority (80%) of former students who responded to this survey are employed, while only 15% are self-employed (the rest are divided between unemployed and retired). Consequently, the sample that responded to this report is likely to be more sensitive to the Personal Income Tax (PIT/IRS).
The vast majority (92%) believe that taxes are too high. This opinion may result not only from the taxes that are actually paid but also from the feeling that these taxes are poorly managed. Public services have not improved or have even worsened (healthcare, education, police, justice, etc.), notably with staff shortages, strikes, long waiting lists, among others.
Moreover, The Lisbon MBA alumni (88%) strongly believe that the economy would grow more with fewer taxes. It can be inferred that there may be some fatigue in tax collection. Possibly the Laffer curve would adjust to the current situation, where after the optimal tax rate, any increase in the tax rate would generate less tax revenue. This means that with lower taxation, tax collection could even increase, as it would allow the economy to grow more rapidly and possibly attract more people and Foreign Direct Investment (FDI) to Portugal (again, 88% of the alumni believe that lower taxes would attract more FDI). Additionally, although it is beyond the scope of the survey, there is a common belief that the informal economy is too high in Portugal, especially when compared to other developed countries. Thus, if this underground economy could be taxed, it would allow the economy to be less taxed.
When asked what would be more important to stimulate the economy between reducing the Corporate Income Tax (CIT/IRC) and the Personal Income Tax (PIT/IRS), almost two-thirds of the alumni believe that it will be the PIT that will have a greater impact. In contrast, just over a third believe it to be the CIT/IRC. Like many things in life, there are no “yes or no” answers to such a complex question. A reduction in PIT/IRS and/or CIT/IRC would bring more disposable income for individuals and companies to consume, invest, or deleverage.
Finally, regardless of whether the taxpayer is an individual or a company, what would make a big difference in Portugal would be to have a consistent, easy-to-understand, and fair tax code for taxpayers making decisions based on the law at any given time. Often, taxpayers are led to make long-term decisions or long-term investments based on certain assumptions that no one can guarantee will last the same period. Not to mention that in case of dispute with the Portuguese Tax Authority (PTA), the taxpayer is often required to pay a tax with which they do not agree (or provide a bank guarantee) and then wait a long time for a decision (it is important to note that there is the possibility of resorting to arbitration, which is faster, but unfortunately does not allow appeals in most cases).
Read the full article (original) in Portuguese here.
Source: Dinheiro Vivo
