It is true and well known that in life there are two constants: paying taxes and dying.
However, taxes paid to the public purse are always involved in some controversy, whether for their effectiveness, fairness or practical applicability.
However, whether we like to pay them or not, it is the consensus of the majority that it is something necessary for society to function: whether to maintain the proper functioning of the National Health Service, Social Security and other public services, institutes and related entities.
Now, given the current situation, and facing a scenario of consecutive increases in the tax burden, whether on the side of income taxes (eg IRS) or on the side of consumption taxes (eg VAT, taxes on fuel - ISP), we reached a tax burden level of around 35,4% (according to UTAO data for 2020).
This percentage should, however, be analyzed with a "pinch of salt", since the calculation is made by comparing the level of taxes against the Gross Domestic Product (the country's income, in a simple perspective), that is, it does not reflect in practice the real tax burden on the income of the overwhelming majority of Portuguese families, as it considers the entire “cake” of wealth produced in the country, “swallowing” the asymmetries that exist in the distribution of income.
Some experts point out that the IRS is an instrument of harmonization and that it serves to resolve the asymmetries in the distribution of income.
In my humble opinion, over the last 20 years (at least) income brackets have been shaped by the political class to, on the one hand, manipulate public opinion (with rises, falls and other juggling rates and scales) and, on the other hand , help in the financing of the State, in a short-term financing perspective to keep the accounts “above the water”.
But is increasing taxes consecutively the best way to develop a country's economy?
It is certain that it will bring an increase in one-off revenue to the State coffers, but, in the medium/long-term, it causes destruction of wealth, weakening of the business fabric and an increase in the parallel economy (aka: tax evasion), since many businesses work with an EBITDA (earnings before interest, taxes, depreciation and amortization) that is very weak and fragile to increases in the tax burden.
This is the most common scenario in the Portuguese business fabric.
Furthermore, multinationals with great potential in terms of tax revenue are usually exempt from these increases, as they take advantage of their size, and establish their tax offices in countries with tax regimes that are more favorable to them, thus avoiding contributing to Portugal's tax revenue.
Now, will there be a connotation between the increase in the tax burden and the increase in the shadow economy?
I am convinced that it is. In fact, economist Arthur Laffer shares the same opinion. In fact, he drew the famous “Laffer Curve” on a napkin, in an attempt to illustrate to then US President Gerald Ford (in 1974) that raising taxes would not be the best way to increase tax revenue or pursue the desire to develop economically the country.
In this curve, Laffer mirrored the relationship between tax rates and the amount of tax revenue collected by governments, noting the existence of an optimal point.
From that point onwards, increases in tax rates lead to a reduction in tax revenue due to the adaptation of the behavior of economic agents, namely through the concentration of their productive effort around activities with a less intense tax burden and the adoption of practices associated with idea of the “parallel” economy.
Thus, in a context in which the Portuguese economy is seriously weakened by the paralyzing effects of the pandemic, I honestly hope that the measures taken around tax revenue will favor economic growth, so that we can gradually reach, in the near future, a level of similar economic development to our northern counterparts in our esteemed European Union.
Author Luis da Ponte is the son of an Algarvian mother and a northern father, he was born in the North, but it was in the South that he found a home.
He is passionate about travelling, car mechanics, and curious about Nature.
He has a degree in Business Management and a postgraduate degree in Corporate Finance from the University of Algarve.
He also has a degree in Public Administration from the University of Minho.
He was Vice-President of the Finance Department of AIESEC at FEUALG and also Vice-President of the Center for Studies in Public Administration at the University of Minho.
He is an effective member of the Ordem dos Economistas and, professionally, he is a managing partner of TSE Industrial Lda and owner of the VDP Seguros agency.
Note: article published under the protocol between the Sul Informação and the Algarve Delegation of the Order of Economists
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