Fiscal reform under discussion for 1999

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Portugal's draft national Budget for 1999, which was presented in October 1998, would bring changes in the taxation of employment-related income. Although ostensibly in line with the 1996-9 tripartite Strategic Concertation Pact, the current proposal is far from being accepted by all the social partners.

Portugal's current taxation system was put into place, in large part, as a result of the fiscal reform of 1989. This was an important step towards modernising the country's taxation system, taking it from an antiquated system of "mixed" taxation to an integrated system with a personal income tax working in conjunction with a corporate income tax. Thus, a single personal income tax was created - the Single Personal Income Tax (Imposto único sobre os rendimentos, IRS).

When the IRS was created, it was considered important that it be a single tax that would cover different types of income as well as be progressive - that is, based on the taxpayer's ability to pay. The tax as it stands now is scaled into four tax brackets (different rates of taxation for different levels of income), thereby incorporating the principle of progressivity. It also includes a set of deductions from taxable income, namely educational, health and housing expenses, as well as a set of tax benefits, in general geared towards wider economic and social objectives (incentives for buying a home or setting up a supplementary retirement plan, for example).

However, the process of legislative regulation and putting the IRS into practice led to some deviations from the original design of the tax. This has had serious consequences for some groups of taxpayers and has not always led to greater efficiency or economic results. The social partners on the trade union side - the General Confederation of Portuguese Workers (Confederação Geral dos Trabalhadores Portugueses, CGTP) and the General Workers' Union (União Geral de Trabalhadores, UGT) - have long demanded reforms in the system. They consider it particularly unjust that dependent employed workers bear a particularly heavy tax burden.

The Strategic Concertation Pact

The diagnosis of the problems that beset the Portuguese taxation system, and the IRS in particular, is based on points that are widely agreed upon in Portuguese society:

• the proportion of the GDP represented by income tax (around 7%), although one of the lowest in the EU, is due, in large part, to the low per capita GDP in Portugal and to the large proportion of low-income households;

• certain types of income are more difficult to tax, leading to numerous cases of fraud and tax evasion;

• the tax burden falls too heavily on employment-related income, particularly on that of dependent employed workers. In 1998, it is estimated that 61% of all direct taxes levied will be from income taxes, and, of this, 76% will be collected from dependent employed workers or pensioners; and

• taxation is not truly progressive for many low-income taxpayers.

The need for reform in the taxation system led the government and the social partners to take on, in the 1996-9 Strategic Concertation Pact (Acordo de Concertação Estratégica, ACE), the implementation of a set of measures whose main objective, as far as taxation of income from dependent employment goes, is to redistribute the tax burden. The Pact (PT9808190F) was signed in 1996 by the government, the Confederation of Portuguese Industry (Confederação da Indústria Portuguesa, CIP), Confederation of Portuguese Commerce (Confederação do Comércio e Serviços de Portugal, CCP), Confederation of Portuguese Farmers (Confederação dos Agricultores de Portugal, CAP) and UGT. The aim is to reduce taxes for dependent employed workers, particularly low-paid workers, without unduly overburdening middle-income workers. This objective is linked with another - the fight against fraud and tax evasion, which is rampant in some segments of the working population.

Because the government believes that the principle of progressivity has been compromised, it has made several commitments in this domain, namely to implement a system that would replace tax deductions with tax credits, as well as to increase the number of tax brackets. It is also committed to pursuing a policy of increasing assistance to families in the form of more favourable tax treatment for dependent employed workers of expenses relating to health, education, and assistance provided to parents and grandparents.

The proposed 1999 national Budget

The proposed national Budget for 1999 that was presented on 15 October 1998 would introduce significant changes in taxation of dependent employment-related income. Among the proposed changes is the introduction of a new income tax bracket with a reduced tax rate. The government hopes, thereby, to reduce taxes on very low incomes. In addition, a majority of the current tax deductions will be transformed into tax credits, which, in the new tax scheme, will benefit those with the lowest incomes, thus making the taxation system more progressive.

Although, in general terms, these proposals seem to be in line with objectives supported by the trade unions, their initial reactions have been negative.

CGTP believes that the current proposal does not respond to the express need to reduce the tax burden on employment-related income, and its impact on the lowest incomes, though positive, is not very significant.

UGT, while agreeing with some of the instruments chosen to effect changes, believes that the desired objectives have not been fully met. In effect, injustice in the taxation system persists, since the principal source of direct tax receipts continues to be income from dependent employment. At the same time, the proposal is criticised for not fully respecting the commitments made in the ACE, namely with regard to policies to provide greater assistance to the most needy families and the guarantee not to penalise middle-income taxpayers.

Commentary

Tax reform in the area of employment-related income must take place in a framework of comprehensive reform and modernisation of the taxation system, including taxation of businesses, property, inheritance and donations. This reform should be accompanied by earnest combat against fraud and tax evasion.

In the last few years the government has begun to implement a set of measures to combat fraud and tax evasion, with some, but not enough, success. In the current period in which budget policy is subject to EU restrictions regarding deficits, losses in tax revenue due to evasion cannot be ignored. These losses cannot continue to be compensated for by taxing those incomes that are most easily identified and collected from, that is, individual income, particularly work-related. Within this group, the existing imbalance between taxation of self-employed and dependent income must be corrected so as not to penalise the latter. (Paula Bernardo, UAL)