In its first bill, passed on 14 July 2011, Portugal’s centre-right coalition government outlines an ‘extraordinary’ surcharge to be imposed on personal income. The tax will hit the Christmas allowance, a highly sensitive payment seen as a necessary 13th monthly wage by many families. This measure was not envisaged in an agreement signed with the EU and IMF in May 2011. Trade unions have reacted strongly to the measure which they say penalises workers, particularly the low paid.
In Portugal all employees in the public and private sector are entitled to a Christmas allowance, which is equivalent to one month’s salary paid by employers. The allowance, also known as the ‘13th month’, is subject to the same tax and social security deductions as the normal wage.
In May 2010, Diário Económico newspaper reported that the previous Socialist Party (PS) government had discussed imposing an extra tax on the Christmas allowance in both private and public sectors. This additional tax would have had an immediate positive impact on public finances.
Such a measure has always been considered highly unpopular because the Christmas allowance plays an important role in family finances, compensating in part for the low wages paid in Portugal.
The only time there has been a break with this consensus was in 1983 under an agreement with the International Monetary Fund (IMF), when the allowance was subject to an additional tax of 25%.
For this reason the PS government decided not to go ahead with the tax.
This year the issue came under discussion again during negotiations on a financial bailout for Portugal, concluded in May 2011 (PT1105019I), leading to a Memorandum of Understanding (211Kb PDF) with the European Commission (EC), the European Central Bank (ECB) and the IMF.
The memorandum, which laid down tough austerity measures, did not include cutting the Christmas allowance. The then Prime Minister José Sócrates also stressed in his first statement after signing the agreement that the Christmas allowance had not been compromised by the austerity package.
The new centre-right coalition of the Social Democratic Party (PSD) and the People’s Party (CDS-PP) took power on 21 June 2011 and presented its first bill (Bill No. 1/XII) to parliament on 14 July – a proposal to implement an extraordinary surcharge on personal income tax for 2011.
This surcharge would have a big impact on employees’ 2011 Christmas allowance, and further impact their income in 2012 in line with the calculation of families’ income during the year 2011.
The measure was announced by Prime Minister Pedro Passos Coelho in his speech opening a debate on the government programme in parliament. He justified the measure as ‘extraordinary’ and necessary to balance the public accounts.
Prime Minister Coelho stated that the government would introduce, just for this year, ‘a special contribution to the fiscal adjustment’, a one-off tax of 50% on any amount above the mandatory minimum wage of €485 paid in the Christmas allowance.
Minister of Finance Vitor Gaspar said the tax would bring in €1,025 million, with €840 million being deducted from employee wages this year and the remaining €185 million in 2012.
Of the expected revenue for this year, 75% will come from wages and 25% from pensions. For wage earners and pensioners, the government will collect the tax by withholding part of their Christmas allowance. Taxpayers who do not receive a Christmas allowance, such as the self-employed, will pay the tax after filing a tax return for 2011.
The trade union confederations reacted strongly to the government’s announcement.
Both the General Confederation of Portuguese Workers (CGTP) and the General Workers’ Union (UGT) criticised the government for imposing additional taxes on labour, while corporate taxes and capital income remain unaffected by the measure. They argue that the principle of social solidarity is not being respected.
Both trade union confederations say that the measure will reinforce inequality and will undermine purchasing power and savings, contributing to the decline of domestic demand and reinforcing the economic recession.
CGTP is of the opinion that it is not good enough to exempt only those who are paid less than the mandatory minimum wage, because this wage level lies just above the poverty threshold.
The union says the tax should apply to all incomes, in the interest of social solidarity. There are no technical reasons for ignoring capital income and no reason not to introduce a progressive element to the new tax, so that those who earn more pay a larger proportion of it.
Maria da Paz Campos Lima, Dinâmia