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a blog from young economists at Nova SBE


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Car Tolls on German Autobahns: A Discrimination Against Non-German EU Drivers?

As was communicated today, September 29, the European Commission is to file a suit to the European Court of Justice against the introduction of a car toll on German autobahns notified by the German Ministry of Transport, Building, and Urban Development back in 2015 (https://www.tagesschau.de/wirtschaft/klage-pkw-maut-101.html). Its rationale is that, simultaneously with the law that introduced the road charging scheme, the German parliament had passed a law that grants the owners of cars registered in Germany a “deduction of the road charge from their annual vehicle tax bill” (http://europa.eu/rapid/press-release_IP-16-1456_en.htm) and therewith constitutes a discrimination against drivers from other EU member states.

But how much, political and economic, truth is in the Commission’s accusations? The two arguments central to its complaints are that (1) exclusively German drivers will receive full waivers of the charge and that (2) short-time badges, which are usually purchased by foreigners, are disproportionately expensive (http://www.sueddeutsche.de/politik/umstrittene-strassennutzungsgebuehr-eu-kommission-verklagt-deutschland-wegen-pkw-maut-1.3184600). Although there cannot be much debate about whether the policy is; in pure price terms; in favour of German drivers or not it is still worthwhile asking two questions, the first being whether actual impacts on the travel behaviour of non-Germans are likely to occur and the second being whether German drivers are likely to be impacted significantly less than non-Germans. If, and only if, both questions were to be affirmed it would be reasonable to speak of true discrimination.

In his 2008 study Australian researcher, Todd Litman, summarises that drivers’ price elasticity for short-time road charges ranges between -0.21 and -0.83 (http://people.uwec.edu/jamelsem/268/handouts/unit1/transportation_elasticities_victoria.pdf). Simply speaking, this is equivalent to stating that for every unit of payment (say, for instance, €1 per km) the short-term road charge is increased drivers are willing to drive between 21% and 83% less in distance than without the increase. Conceding that the exact effect of road pricing partly depends on the type of toll applied, Litman still proceeds to state that in certain cases road traffic may be reduced by 6% to 15% upon introduction of road charges. Presuming the correctness of his analysis we might then conclude that indeed non-German drivers’ travel behaviour might be significantly altered by the car toll.

On the other hand, research by Douglass B. Lee, Jr. (http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.278.6446&rep=rep1&type=pdf) makes it clear that there is more to alterations in highway travel behaviour than merely road tolls. The author identifies as many as seven behaviourally relevant parameters that can only jointly be used to assess policy effects on drivers’ travel behaviour, a decisive one being the tax on petrol. Given the current political debate in Germany about a mechanism that automatically adapts the tax on petrol to drops in the level of fuel prices (http://www.faz.net/aktuell/wirtschaft/energiepolitik/dobrindt-lehnt-automatische-steuererhoehung-fuer-benzin-ab-14388981.html), it seems severely questionable that German drivers will be dramatically favoured as compared to their European neighbours.

As far as the German Minister of Transport, Alexander Dobrindt, is convinced the planned reform is “in conformity with European law” (https://www.tagesschau.de/wirtschaft/klage-pkw-maut-101.html; translated by the author). The above insights provided, it remains yet open for scientific discussion whether the measure is fair towards other members of the European Union, and whether its economic benefits will outweigh its drawbacks.


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Costs of a new property tax

The announcement of Portuguese government of a new property tax has brought controversy over the past week. This eventual measure for 2017 would impose an extra tax on the real estate valued above a certain threshold between  ½ million to 1 million euros.

The tax is being negotiated between the party in government, PS and its partners in the parliament, the left-side parties of BE e PCP, and without any assured information yet. Here I will address the economic disadvantages that may derive from this measure

Who would this tax effect is the first consequence in mind. Property owners are already subject to taxes when buying a house (IMT) and an yearly tax on real-estate (IMI). For the majority of Portuguese people, property owners, that may be overloaded with a third tax. Depending on its actual legal framework, this measure may affect more than just the property of the wealthy, although the family house is expected not to be considered when taxing.

Given the believe that the wealthy would encounter a way of avoiding taxation and the fact that the poor don’t own property to be taxed, this tax could have an undesired effect on an already struggling middle class.

Nonetheless, there may be ways of focusing the tax on those who are wealthier. For instance, there may be need for a special case created for those who own and rent property, but would not gain profit anymore if affected by the tax or for those who inherit real-estate, without the income to pay taxes on that heritage.

Investment would also be affected by this measure. With this tax it becomes more expensive to acquire or maintain real-estate in Portugal. Furthermore, frequency in modifications fiscal legislation and taxation, brings uncertainty about future fiscal laws, resulting in higher risk for investments. Teodora Cardoso, president of the Conselho de Finanças Públicas Português (Portuguese Board of Public Finances) makes the point that for investment there needs to be “stability and predictability” in the fiscal policy.

This tax intends to improve government’s’ income by taxing the wealthiest. This policy must take into account that it may have the opposite effect, leading to a decrease in investment in property and all sectors that are dependent when doing business or moving to Portugal. In this economic setting a decrease in investment prospects would be highly damaging.

The estimated increase in government’s revenue would be between 100 to 200 million. The economic cost brought by its impact on the middle class and investment must be considered when designing the concrete measure.


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Abolishment of notional interest deduction: reasonable or not?

In 2006, a drastic change took place in the Belgian financial world. The Belgian government established a new financial policy, and the notional interest deduction was born. This somewhat odd concept implies that enterprises who possess a lot of equity (in comparison with their debts) can deduct a certain percentage of the corporation tax. The size of the deduction depends on the magnitude of the equity, and the interest rate used on that equity to compute the deduction is based on the rate of 10-year government bonds. In 2007, the notional rate was around 4%, but now it’s already around 2% [1][2].

The main reason why this deduction was founded, is to make financing with equity more appealing. After all, for small businesses financing with debts is preferable (interest on debts are deductible , more easy to obtain,…), but is also dangerous because bankruptcy changes increase. The deduction works than as an incentive to strengthen the equity of the firm, and as a result they are more solid and resistant -certainly in times of crisis-. Secondly would the new regulation also attract foreign enterprises with lots of money who may want to invest their profits into Belgian companies, since foreign multinationals own a lot of equity on their balance sheet.

 

The current minister of finance, Johan Van Overtveldt, wants to reform the current financial policy drastically. He wants to lower the corporation tax from 33.99% to 20% by 2020. In order to execute and partly finance this, he wants to abolish the notional interest deduction [3].

The most important reason for the reform is the fact that the national SME’s are left in the cold. Currently, SME’s have to pay the remarkable high corporation tax of 33.99%, and they can hardly benefit from the notional interest deduction, since it’s difficult for them to obtain a lot of equity. Van Overtveldt says that the current financial policy is too much focused on the money of the foreign investors. In his opinion, we should pay more attention to the SME’s, who are the engine of our economy with almost 70% of the employment [4][5][6].

Secondly, Van Overtveldt states that foreign authorities will start to tackle the notional interest deduction. For example, the authorities of our most important foreign investor, the USA, are planning to tax American enterprises heavily, who make use of the deduction. Consequently, Belgian enterprises will be less appealing to invest in, and they will invest their money elsewhere [7].

The degradation of the corporate tax, in combination with the abolishment of the deduction will make it also easier for start-ups to grow their businesses, and will also make our national enterprises more competitive abroad.

 

Of course, the financial reform has also a lot of opponents, mainly from the conservative and socialist  political parties CD&V and SPA. The main concern is how the government will finance the tax degradation, since they avoid a lot of tax incomes. There are questions about Van Overtveldt’s calculations, in which he states that a large part will be compensated with the abolishment of the notional interest deduction. Opponents argue that Van Overtveldt  overestimates this compensation, since the deduction has already been  strongly reduced  to only 2% in 2016 (not surprisingly, since the notional rate is based on the 10-year government bond rate, which is historically low) [8][9].

 

In my (humble) opinion, it is clear that a financial reform is needed. The reasons why the notional interest deduction was established are reasonable and understandable, but we have to keep in mind that those measures were taken in different (and bad) times. A national government should always support its SME’s, certainly when they employ nearly 70% of the labour force. That’s why I hope that corporate taxes will reduce, but not at any cost of course.

 Cédric Bauwens                                                                                                          19-09-2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1]http://financien.belgium.be/nl/ondernemingen/vennootschapsbelasting/belastingvoordelen/notionele_interestaftrek

[2] http://www.bespaarbelastingen.be/algemeen/de-notionele-intrestaftrek-voor-2016-aj-2017/

[3] http://www.tijd.be/opinie/algemeen/Lagere_vennootschapsbelasting_voor_kmo_s.9727277-7765.art?highlight=van%20overtveldt%20notionele%20interestaftrek

[4] http://www.unizo.be/nieuws-pers/unizo-over-voorstel-vennootschapsbelasting-huidig-systeem-niet-aan-kmos-aangepast

[5] http://www.tijd.be/nieuws/archief/Meerwaardebelasting_is_niet_eerlijk.9804897-1615.art?highlight=notionele%20interestaftrek

[6] http://fokus-ondernemen.be/2016/05/25/de-start-upcultuur-vind-ik-geweldig/

[7] http://deredactie.be/cm/vrtnieuws/politiek/1.2573952

[8] http://www.standaard.be/cnt/dmf20160824_02437123

[9] http://deredactie.be/cm/vrtnieuws/politiek/1.2573952


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Universal Basic Income: A Finnish Social and Employment Experiment

In 2017, the Finnish Ministry of Social Affairs and Health is to mandate a pilot project aiming to assess the usefulness of universal basic income (UBI) as a means of radically overhauling the social security system all the while promoting employment and cutting government expenditures (http://stm.fi/artikkeli/-/asset_publisher/sosiaali-ja-terveysministerio-pyytaa-lausuntoja-osittaisen-perustulokokeilun-toteuttamisesta?_101_INSTANCE_yr7QpNmlJmSj_languageId=en_US). But how could an unconditional, tax-free, and non-means-tested grant of €560.-/month to every citizen possibly be financed; let alone be profitable for a country?

It can so in an astoundingly easy fashion, say Swiss Institut Zukunft [Future Institute] researchers, Müller; Renninger; and Straub (http://zukunft.ch/potentialanalyse-grundeinkommen.pdf). Through the contentment and motivation drawn out of the financial treat the authors expect the workforce to reach higher levels of labour productivity, leading to increased economic output and; ultimately; higher government tax income. This effect is amplified by the demand-side effect of increased consumer spending. The authors farther believe the diminishment of financial insecurity to lower the public cost of stress-related psychic and physical ailments whilst, simultaneously, incentivising entrepreneurship; the latter of which is theorised to grow stronger over time. Furthermore, when compared to conventional social benefits, UBI is less prone to benefit fraud, thus circumventing the misallocation of state funds (https://www.thersa.org/discover/publications-and-articles/reports/basic-income).

More tautologically than vindicatorily, various sources (www.economist.com/news/leaders/21699907-proponents-basic-income-underestimate-how-disruptive-it-would-be-basically-flawed, https://www.theguardian.com/world/2016/jun/02/state-handouts-for-all-europe-set-to-pilot-universal-basic-incomes, and many else) stress that UBI is in itself an indispensable concept in light of the speeding automation of work and the underemployment rooting therein.It is widely believed that humans will not be able to make a living from their jobs in conceivable future. The financial safety net spun by UBI, however, would enable them to temporarily leave the workforce to undergo (re-) trainings and qualify themselves for intellectual work that cannot be done by machines, thus forestalling the incomparably higher social expenses of mass underemployment.

So far resembling a utopian vision come true, UBI still has its downsides when it comes to being implemented in policy. One – seemingly simple! – barrier to be broken down in establishing UBI is the design of specific modalities for disbursement. Is UBI to be paid out using existing income tax mechanisms? But if so, what about non-income-tax payers, or those citizens not formally taking part in the economy? In what rota will disbursements be made, and how can sufficient liquidity be ensured at these times? There is also some difficulty in creating and maintaining an encompassing cadaster of recipients and monitoring whether disbursements are actually received by all those entitled. Ultimately, UBI is suspected to miss out on so-called psychological and behavioural feasibility: in societies that value work as a basis of legitimacy of wealth it will be hard to justify UBI to the broad public, and pressure will weigh on those leaving the workforce for living off the others’ pockets (psychological feasibility); and the policy runs the risk of undermining itself through driving people out of the workforce, thus drying up the source of funds used to finance UBI (behavioural feasibility).

Amongst the Finnish, the expectation prevails that UBI will heave up employment by incentivising current recipients of social benefits to take on part-time jobs without having to fear the loss of financial support (http://www.forbes.com/forbes/welcome/?/sites/francescoppola/2016/08/27/&toURL=http://www.forbes.com/sites/francescoppola/2016/08/27/&refURL=&referrer=). In the light of recent research, whatsoever, the pilot is more of a surprise package with manifold possible outcomes.


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Smoothing concerns over the investment in upper secondary compulsory schooling

In Portugal, 2009, the compulsory schooling increased from lower secondary, or 15 years old, to upper secondary education (scientific-humanistic, technological, artistic and vocational courses), or 18 years old. Portuguese citizens were, and some of them still are, concerned about this policy: is it desirable to force teenagers, who want to dropout school, to study, against their will?

I would say yes. Nevertheless, economists often perceive education as a driver to economic growth, due to the increase of human capital in the labour force (increasing innovative capacity and labour productivity). But, empirically, what does data show us?

According to the OECD 2012 Indicators, people who lack upper secondary education face severe earnings penalty in the labour market. It was estimated that a person without upper secondary education could expect to earn 23% less than a person with this level of education, on average across OECD countries. In addition, this report suggests that Portugal was one of the OECD countries in which people who did not attain upper secondary education were particularly disadvantaged (i.e. womens’ without an upper secondary education earnings represented less than 70% of those with it).

Furthermore, other researches found that more education may also be an investment in public health. “Returns to education: the causal effects of education on earnings, health and smoking”, by the Institute for the Study of Labor, suggests that there are substantial direct effects of graduating high school, and that schooling has strong causal effects on earnings, health, and healthy behaviours.

Is it clear that people should attain upper secondary education? I would say so. But some Portuguese disagree, arguing that other European Union countries have higher employment rates and wages with least compulsory schooling, so that compulsory schooling and the economy behaviour should not be strongly related. But is this argument considering cultural differences between countries? No, because while other countries citizens (with compulsory schooling periods similar to the Portuguese) understood the importance of attaining upper secondary education, Portuguese did not. In 2006, three years before the measure was implemented, according to the World Development Indicators, Portugal was one of the European countries with the smallest net secondary school enrolment (83%). Even in 2012, three years after the measure was implemented, Portugal still ranked badly when compared to the OECD average percentage of people that has attained at least upper secondary education, according to an OECD country note.

We can therefore take two conclusions: (1) upper secondary education is important to the society and individual’s earnings and health, and (2) Portuguese people are not aware of this benefits when compared to other countries. This justifies the paternalistic government intervention in 2009, forcing individuals to make better choices for their future.

Nonetheless, even though students spend more years in school, this does not imply they understand the importance of learning and enjoy the advantages that more education provides. Therefore, based on the previous arguments, educating families on the relevance of education might be the best way to increase the efficacy of this policy, and the return of the taxpayers investment.

 

Patrícia Sofia Pinto e Filipe 

Public Finance


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The New Property Tax: Social Blessing or Electoral Curse?

Last week, the Portuguese central government, together with the left-wing party Bloco de Esquerda, announced the creation of a new property tax.[1] It was an informal announcement of the proposal that is going to be voted in government budget for 2017 and important details are not yet fully known.

This was not surprising, given that this tax was in the political agenda of the government and it is in line with the current Portuguese fiscal policy. However, it was enough to create media frenzy in past days, especially with local elections coming up next year.

The new tax is going to be independent to the existent property tax, Imposto Municipal de Imóveis (IMI), and progressive – taxpayers with a tax base lower than 500 thousand euros are exempt (the final value was not fixed yet, but it will be between 500 thousand and one million euros). Moreover, this is going to be a global property tax, in the sense that it is not applied to the assessed value of each property but to the total assessed value of the properties owned by the taxpayer. Some exemptions are also being discussed, namely for assets utilized for productive uses.

According to the government, this tax is meant to target the accumulation of wealth and therefore to promote redistribution. These are known as the main features of wealth taxes[2] and which make it socially and politically desirable. In fact, after the last economic crisis, several economists defended the introduction of wealth taxes as a solution but as just as a temporary and not permanent fiscal instrument. For example, Bach and Wagner (2012)[3] support a one-time tax on all wealth holders with the goal of retiring public debt, with main argument that increased levels of public debt are accompanied by mounting private wealth, which is increasingly concentrated on the wealthy elite.

Furthermore, the new tax in case is a tax on real property that is known in the taxation literature for its virtues, namely low efficiency costs, benign impact on growth and high score on fairness (Norregaard, 2013). However, to reach its potential in terms of efficiency and equity, it requires an adequate evaluation of the tax base and correct management of the property assessment system to keep the assessed values in line with their true market value. Therefore, in order to achieve its redistribution goals, this property tax reform should be carefully engineered in terms of the tax base, brackets, exemptions and deductions.

Taking all this into consideration, theoretically, this new tax – if correctly designed! – seems to be an efficient measure to raise revenues and reduce inequality. However, being 2017 a year of local elections and the property tax an extremely unpopular tax (Cabral and Hoxby, 2012), it is going to interesting to analyze the upcoming political discussion and the consequent electoral outcomes.

Catarina Alvarez

References:

  • Cabral, Marika and Hoxby, C. 2012. “The Hated Property Tax: Salience, Tax Rates, and Tax Revolts,” NBER Working Papers 18514, National Bureau of Economic Research, Inc.
  • Norregaard, J. 2013. “Taxing Immovable Property Revenue Potential and Implementation Challenges,” IMF Working Papers 13/129, International Monetary Fund.

[1] http://observador.pt/2016/09/15/governo-e-bloco-negoceiam-novo-imposto-sobre-patrimonio-acima-de-500-mil-euros/

[2] The property tax is one example of a wealth tax, together the property transaction tax, inheritance tax, gift tax, etc.

[3] http://voxeu.org/article/eurozone-crisis-time-tax-rich


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Universal basic income plan Switzerland

The idea of giving money for free gained attention the last years. In 2017, Finland will start a pilot project to provide a basic income to 100000 Finish inhabitants. The universal basic income plan of a Swiss proponent group was a controversial proposal which created a lot of discussion in Switzerland and dismissed by most of the Swiss politicians. The proposal of the basic income provides a guaranteed, unconditionally income for all the Swiss inhabitants without any regard to age, wealthy or not, where you live in the country, education and unemployment or not. The campaigners collected 100000 signatures to organize a ballot, the 5th of June 2016, to let the inhabitants make their opinion about it. The voting was not a success; the majority (77%) of the voters opposed the plan.

From the support camp there were a lot of arguments to introduce a basic income. Over 50% of work done in Switzerland is not paid (BBC Website). Care work, working at home and working in communities or societies are some examples of it. With a basic income this work would be valued a lot more than before. The inhabitants would no longer receive social benefits and insurance but instead they would receive 2500 Swiss francs per adult and 625 Swiss francs per child (Swissinfo.ch). This annual cost of this system would be, estimated by the government, 208 billion annual francs (Reuters). The basic income would replace all the other benefits and in that way, it makes the Swiss inhabitants more self-contained. It would also fight against extreme poverty and inequalities in the society. Through to an increase of technological capabilities of machines and the rapid technological change the last years, robots and machines would take over jobs and these jobs would become obsolete. The basic income would also provide more time for young people to study and starting an own business would be encouraged.

The financing part of these proposal is very difficult and the essential part. The way how this plan would be funded is not clear in scientific papers and articles I read. That’s also one of the reasons why the Swiss inhabitants were doubting about the viability of this system. By introducing a basic income, the government could save money by shrinking some federal bureaucratic institutions. To fund the income, tax increases are needed. According to an internet article on fastcoexist.com, about three-quarters of the cost would come from new taxes. New taxes have to be imposed to pay for the system. Higher tax on sales, tax on all of the electronic transactions and a value-added tax could be imposed but the value-added tax, a tax on the gross-margin of each transaction, would penalize the poor people but then you come to a vicious circle. As mentioned before there is less consensus about how to fund and that scares the opponents of this plan. Not only the financial part is a big issue, opponents point out that in Switzerland there is already a well-functioning welfare system and this social system works so opponents are not willing to change the system as how it is set today.

As mentioned in the beginning, Finland is one of the first countries to launch a pilot project a system of basic income and many countries are curious to see what the outcome will be. The basic income must always be seen in a cultural context so countries must pay attention while comparing with others (The Basic Income Debate in Switzerland: Experiences and a Republican Perspective, Eric Patry).


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IMI Exemptions: the most recent changes, their motives and controversy

The Portuguese Property Tax (Imposto Municipal sobre Imóveis, IMI) is a direct tax on the value of urban and rural properties, paid by the holder of their right, but there are some reductions and exemptions. Regardless of all arguments, fiscal benefits are synonymous with less tax revenue, and therefore they should have a welfare-generating purpose to compensate the lack of government expenditure or of a public good.

In the past few months, there have been some changes to the Property Tax Law, connected with the 2016 State Budget, all of which come into effect through a Decree-Law from August 2016. For example, there will be an exemption of this Municipal Tax for families with gross income up to 11570€ per year, the effect of the number of children on a family’s IMI contribution has changed, and the maximum rate went from 0,5% to 0,45% of the estate’s valuation.[1] Most recently, an increase in the weight of the “relative location and operationality” coefficient is to change the value of some properties, and consequently, the taxes to be paid for them.[2]

Fiscal benefits include tax reductions and exemptions, and they have always been a part of the IMI Law, such as those for rural property corresponding to areas covered by forest intervention zones, for companies that realize relevant investments, and even urban properties considered as a permanent place of residence.[3]

In Portugal, the Law of Religious Freedom states that religious collective persons are exempt from any tax or contribution on places exclusively for religious activities, teaching of religion and estate being used by Particular Institutions of Social Solidarity (IPSS)[4]. Particularly, the Catholic Church has an agreement from 2005 with the Portuguese State about Tax Exemptions (called the Concordata), including the difference between IMI exemption for religious and social benefit properties, but not properties used for profit of the Church.[5]

This year, however, parishes have begun receiving warnings from the Tax Authority to pay this tax on certain properties, which has caused a public opinion stir. On one hand, the reaction of the cardinal patriarch of Lisbon, was that he only “expected the agreements and the Law to be upheld, rejecting any further privilege”[6], days after the Ministry of Finance had declared that neither the law of religious freedom, the Concordata, or any of the other documents that regulate this tax had been subject to changes.[7]

The consequences of a change in tax exemptions to a considerable amount of properties are still a matter to be studied, considering that this tax is complex in itself and small changes can have a big impact. Besides, the toll of this burden on institutions for Social Solidarity would also need to be considered and researched. Still, this case appears to have been a misunderstanding, as there is no legal proof of changes in these exemptions, yet. In the Bible, it is mentioned often that the worst job to have is tax collector, and in Portugal it seems that way once again, no matter how tax policy is designed.

 

Ana Paisana Belo

 

[1] http://www.dn.pt/portugal/interior/familias-mais-pobres-isentas-de-imi-mesmo-com-dividas-ao-estado-5079352.html

[2] http://info.portaldasfinancas.gov.pt/NR/rdonlyres/0E9A0D82-DC4C-4A6E-AAAE-41222A6EA633/0/Decreto_Lei_41_2016.pdf

[3] http://www.pwc.pt/en/pwcinforfisco/tax-guide/2016/imi.html

[4]http://www.pgdlisboa.pt/leis/lei_mostra_articulado.php?artigo_id=806A0037&nid=806&tabela=leis&pagina=1&ficha=1&nversao

[5] http://info.portaldasfinancas.gov.pt/NR/rdonlyres/50808178-A248-44F2-9EC8-B3B072A99753/0/circular_10-2005_de_21-11_gabinete_do_director-geral.pdf

[6] http://observador.pt/2016/09/01/cardeal-patriarca-espera-que-estado-cumpra-acordos-existentes/

[7] http://observador.pt/2016/08/31/assuncao-cristas-se-igreja-pagar-imi-revisao-tambem-deve-afectar-partidos-e-sindicatos/


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The controversial minimum wage

The alarming year of 2008 will always be associated with probably the worst financial crisis since the Great Depression of the 1930s, which ultimately resulted in a severe economic decline during the following years. Europe was harshly hit by such crisis, with special evidence on its southern countries like Portugal. Therefore, several measures were taken to turn the situation around, being one of them the freeze of salaries, namely the national minimum wage.

The national minimum wage is a price floor, meaning that no worker can be legally employed at a lower wage. During the freezing time (2011-2014), the minimum wage in Portugal was 485 euros, rising to 505 euros in 2014. Although when the Socialist Party constituted government with the support of left-wing parties, the minimum national wage increased to 530 euros this year, with a planned gradual increase to 600 euros until 2019.

Obviously such policy has different outcomes for different stakeholders (workers, corporation and Government), existing therefore opinions for and against it.

On the one hand, some argue that the introduction of a minimum wage law lead to the increase of unemployment, especially for the youngest and least skilled workers, and to the damage of smaller and medium businesses, as they will struggle to keep their competitive indexes and investments the same with a higher minimum wage.

On the opposite side, supporters of the increase of the minimum wage claim that such policy improves the life quality of the employees and allows them to have a higher purchasing power parity, once has they have more money they can spend more and circulate more money in the economy. Such increase of the minimum wage would also be positive to keep companies stable, as employees would have less incentives to leave, allowing savings on training costs. Moreover the strongest argument of this position is one of Krueger and Card’s study statement that there is no indication that the rise of the minimum wage reduces employment [1].

For Portugal, so far, the outcome has corroborated the Krueger and Card’s study: the prime-minister António Costa claimed that “(…) the increase of the minimum wage in 2016 did not contribute to the increase of unemployment, which fell this year” [2]. According to such results, CGTP general secretary, Arménio Carlos, argued then that “there is no reason for the minimum wage not to evolve again in 2017” [3].

The controversy from this topic come from Brussels. The European Commission considers that increasing the minimum wage to 600 euros in 2019 is not aligned with the macroeconomic scenario in terms of inflation, unemployment and productivity growth. There will be pressure to increase the remaining wages besides the minimum one, which may lead to loss of employment and competitiveness if not aligned with productivity growth [4].

Despite the negotiations between the Government and the social partners, the annual increase of the minimum wage until 2019 will just be implemented year after year, if the Government and CPCS (Confederações Patronais e Confederações Sociais) perceive the policy as social desirable.

 

Miguel Madeira

References:

[1] Card, D; Kruegman, A; “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania”; October, 1993; <http://www.nber.org/papers/w4509.pdf>

[2] Novais, P.; “Costa diz que haverá aumentos reais das pensões mais baixas e dos apoios sociais”; Jornal Expresso em 17/09/2016 <http://expresso.sapo.pt/politica/2016-09-17-Costa-diz-que-havera-aumentos-reais-das-pensoes-mais-baixas-e-dos-apoios-sociais>

[3] Cabrita, M; “Aumento do salário mínimo não prejudicou o emprego, diz Governo”; Jornal de Notícias em 15/09/2016 <http://www.jn.pt/nacional/interior/aumento-do-salario-minimo-nao-prejudicou-o-emprego-diz-governo-5391900.html>

[4] Fernandes, D; “Bruxelas alerta para impacto negativo do aumento do salário mínimo”; Expresso em 16/04/2016 <http://economico.sapo.pt/noticias/bruxelas-alerta-para-impacto-negativo-do-aumento-do-salario-minimo_247457.html>

 


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A basic income: The pros & cons

In recent years, many countries have conducted a widespread debate about considering to introduce a basic income. In this context, we can think about the petition in Germany, the citizen’s initiative in Spain (2015) and the world’s first basic income referendum in Switzerland (2015). Other advocates of the basic income in recent history are the former Greek Minister of Finance Yanis Varoufakis and the London Based RSA (2015). However, despite the many debates on the topic, no country has yet implemented the system but rather rejected it. So what is a basic income all about?

By definition, a basic income is an income unconditionally granted to all on an individual basis, without means test or work requirement. It resembles to a minimum income guarantee already applied in many European countries but it distinguishes itself in 3 ways. First, it is paid regardless any other source of income. Secondly, it is paid out to individuals rather than households and lastly, it is paid to an individual without any commitment from the individual of having a job or looking for a place to work. This all sounds like too good to be true but what are the real economic and social rationales behind the idea? I will try to provide a brief overview.

The first benefit one can describe is the enhancement of liberty of an individual described by one of the most famous advocates of the basic income, Philippe van Parijs . In his paper, he starts with the argument of people working out of economic compulsion. In this sense, this limits the liberty of an individual. By introducing the basic income, individuals will have alternatives besides being forced into unpleasant work, which will consequently increase their freedom. A second advantage of the basic income can be described as a potential reduction of poverty. Indeed, a basic income can allow the poorest to obtain an income and hence abandon their lives in poverty. Third, the basic income may induce people to invest in theirselves by for example getting an education which may lead to them getting higher earning jobs and thus resulting in a stimulation of overall economic welfare. Ofcourse, these are all theoretical assumptions and are yet to be proven.

Whenever there are pros, cons will exist. Indeed, a first drawback of an introduction of a basic income could be a strong decrease in motivation towards working. Individuals may feel they earn enough and may consequently miss the incentive to look for a job or even continue their jobs. Second, financing such a basic income will require huge amounts of funds which governments in many countries may lack without even taking into account the costs that will arise when restructuring the existing taxation, pension and social insurance systems. Third, demographical problems such as immigration escalation should be taken into account with because people from country Y, without the basic income policy will surely want to benefit from country’s X basic income and hence move to country X.

In sum, just like any other government intervention, the basic income has its pros and cons. The answer to the question of which one outweighs the other yet remains debatable. There will always be people in favor of introducing the basic income and people opposed to it. But in recent history, the swiss referendum has shown us that the latter may exceed the first by a significant percentage (76,9 % opposed). The concept may sound interesting in theory, but can and will be difficult to implement in practice.

Vincent Caudron


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State Aid

State Aid

 

On August 30 of the present year the European Commission delivered a press release in which it convicted Apple Inc. to pay around 13 Billion € in “owed taxes” to Ireland, plus interest (European Commission Press Release[1]). Apple argues they paid every euro worth of tax that they were due and Ireland does not want the money back.

Briefly, all of Apple’s profits in Europe were channelled to two entities established in Ireland, which then proceeded to allocate them in a “stateless headquarter”, registered nowhere, which does not exist except on paper and with no meaningful activities. All this with the consent and knowledge of the Republic of Ireland under what we can think of as a bilateral agreement (see Double Irish Agreement[2].) This means Apple payed tax to Ireland on a very small part of its profits, and payed no tax on the rest. (Business Insider explains well the particular case in detail – What Just Happened to Apple?[3] ). In fact, this is not the first time the issue comes up within the EU. Identic issues had come up in the past with Starbucks activity in the Netherlands and Fiat Chrysler in Luxembourg.

The conditions in which these companies operate is not illegal per se. These countries have (in case of Ireland up until January 2015) predicted in their law the existence of said bilateral agreements. It is crucial to understand that the issue is not the low corporate income tax rate that a country may charge on the companies operating in the country (12, 5% for publicly traded firms in Ireland). It is indeed perfectly legal and legitimate for a country to sustain a low corporate tax rate as a strategy to attract investment, foster companies to establish their businesses within its borders and generate employment opportunities for its citizens. In this sense, it looks fairly easy to understand these countries’ position. The authorities may perceive the firms’ establishment and operations in the country to be more than compensatory over the “tax revenue loss”, especially when firms are big. For companies, it is obvious that to establish their businesses in countries where their tax burden is significantly reduced is beneficial.

What the European authorities condemn is the fact that these companies benefit from special treatment from these governments. The EU has no saying in a member state’s fiscal policy but it does play an important role in protecting and ensuring competition fairness within the single market. The specific benefits that these companies receive allows them to operate in advantageous conditions (almost as a subsidy) in relation to their competitors in Europe, in which is called State Aid[4]. State Aid is illegal both in European and country level law, and fair competition benefits consumers (people). Tax competition is legitimate and firms are increasingly allocating resources to develop better tax strategies, but the regulatory authorities, governments and European authorities must continue their work in preventing, detecting these situations and enforcing respective sanctions. The size and status of a business and the implied benefits it may generate for a country’s economy should not interfere with the just and fair business environment we desire to have within the EU.

 

Filipe Bento Caires

[1] http://europa.eu/rapid/press-release_IP-16-2923_en.htm

[2] https://www.ft.com/content/f7a2b958-4fc8-11e4-908e-00144feab7de

[3] http://www.businessinsider.com/what-just-happened-to-apple-explained-2016-8

[4] http://ec.europa.eu/competition/state_aid/overview/index_en.html

 


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Pension’s unfairness: is the Italian pensions system leading to repel young talents in the long-run?

Pensions system is an arduous arguments the public sector faces, since it impacts the well-being of a Country. There is a wide literature in economics on generational accounting, which measures directly net taxes that current and future generations are expected to pay under existing public policy. Notwithstanding, there is no clear consensus among scholars about how the pension structure should look like. Each Country has its own characteristics to tackle and the pension providers face the risk that retirees might live longer than expected (ftp://ftp.igier.unibocconi.it/wp/2012/439.pdf).

Here the attention will be focused on the Italian pension system and its latest reforms. Italy is characterized by one of the largest public debt, a traditionally very generous pension system and one the lowest fertility rate worldwide (http://www.nber.org/chapters/c6695.pdf). The latter, together with the current high percentage of unemployment among young people in Italy, will likely lead to shrink even more the financing for the Italian public intakes addressed to pensions.

The Italian pensions provider is the 100%-publicly owned entity INPS. Accounting for more than 30% of annual public expenditure and nearly 15% of Italian GDP, (http://www.ilsole24ore.com/st/nlprofessionisti/120109/gap/Guida-alle-pensioni-01_2012.pdf), INPS income adds up to negative values since 2012.
The main cause is its addressees imbalance, which in turn is explained by the former Italian pensions system. It regards equality, much more important issue, rather than financial performance (e.g. bad management, corruption, etc.). In 2012, in order to solve this imbalance, the Italian Government changed the retirement distributive structure: it passed from the remunerative method, based on the average of the last 10 years of salary, to the much more fair and unbiased contributory method, which is instead based on the contributions an employee made during his working life. But this was not enough, because the new method is introduced only from new retirees on. The former method de facto caused a great percentage of pensioners (mainly ex-politicians) earning in retirement more than how much they deposited during their working activity. To get an idea of the imbalance, the ratio between retirement benefits to all deposits paid during the entire working life accounts even to seven. This inefficiency will likely lead to a huge problem: scarce resources to feed the future generations’ pensions.

One interesting solution proposed recently by the INPS President T.Boeri is to redistribute retirement benefits from whom is actually receiving rich pensions to whom is receiving less. However, a problem of conflict of interests can probably arise and willingness-to-redistribute must be considered. Besides T.Boeri’s proposal, which in my opinion should be fine-tuned, another solution might be providing incentives to the young generation towards public finance, eventually by favouring its entrance in the job market (e.g. enhancing education).

In conclusion, something more has to be done by the Government in order to discourage and not let young Italian talents escaping abroad. Whichever kind of investments the Government chooses to promote however, will produce effects that are visible only in the long-run.

Francesco Mazzola


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Flat Tax: A Question of Equality

Steve Forbes campaigned back in 1997 with the promise of a 17% flat tax and defended this policy again at an article back this year. He argued that with the simplification of the income taxation the tax payers would save 200 billion dollars and 6 billion hours in tax forms and complying. Simplicity is the main argument in favor of the flat tax!!

But what is a flat tax? A flat tax is a proportional tax, the one that earns more pays more dollars but at the same percentage rate, so everybody pays the same relative amount of the wage. Besides the simplicity we can find other arguments in favor of the tax. The flat tax obliges the rich to pay a very little amount of money in taxes and this can be important to attract foreign investment, this is what is happening in east Europe countries like Estonia.

In under development countries the flat tax can also be helpful in order to easy the tax collection because it reduces the incentives to avoidance of income tax by individuals. But in developed countries like USA this is a lazy option and doesn´t takes in account the real problems of the population but instead responds to other type of incentives.

Fairness isn´t a quality of the flat tax. In terms of utility the income has diminishing returns, so if I take 100 dollars from a lower income citizen I will reduce their well-being by a lot more than if I take the same amount to richer one.  So when applying the same rate of income tax to everybody I don´t take in account that a loss of 10% of the income in the poorer will lead to a loss of well-being higher when compared to the loss of the richer if we take then the same relative amount of income. Concluding, it isn´t fair!

Robert Reich defended back in 2011 that “We already have a flat tax- flat within bracket”. In USA a “worker pays a base rate on the first dollar earned”. So for example, if someone earns 251,000$ dollars it will “have to pay the 39 percent rate on $1,000” and 35% on the $250,000, and not the 39 % on the entire income like some republicans have trying to sell.

In a country like USA, where 15% of the population live in poverty and where the richer 1% percentile earns more and more, the application of a policy that increases taxes on the poor and decreases then at the richer is a perverse decision. Of course there is a lot that can and should be done to improve the progressive tax system, for example make it even more fair because it still taxes with the same percentage a doctor that earns $480,000 a year and millionaires like Steve Forbes, but this millionaires want a reduction of what they pay using the argument that then they will have more to spend (or to lend). However, the richer are spending less or/and badly, so let’s leave that to the Government.

 

João Gonçalo Silva


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Should fertility be considered a public good?

Nowadays a huge debate is being discussed in Italy after the introduction of the “Fertility day”, promoted by the Health Minister Beatrice Lorenzin. This day was thought to stress public attention to the importance of fertility and to underline the danger of falling country birth rates. The reaction has been fierce, with many questioning if there may exist a better way to encourage people to have children.

Actually what has caused such an anger is not just the idea of procreation as a matter for the government to intervene in, but the images associated with women’s role, considered as sexist and ageist[1].

Despite moral criticism, it is important to see the question from an economic point of view. Are we sure that “fertility” should be considered as a public good?  Economists are used to refer to public good as a non-rivalrous and non-excludable item. It is basically a product that one individual can consume or enjoy without limiting its availability to any other individual. Public goods are, by definition, provided by the mean of government in order to avoid free riding issues. In that sense “fertility” is not a public good because there is no direct intervention from a central authority. Neither the intervention seems to be needed as a way to repair a market failure. There is no market failure in having too few children. Most people may agree that having a child is a very personal decision based on own values, circumstances and life or career goals. Some people want to have children, some do not, some might only want them later: all choices are equally logic. One may say that people are free to set their own level of children, even if it is zero, and that government should not intervene in this kind of decision. It should NOT, but it is forced to. Because low birth rate is a primary concern to government and to society as a whole. As a matter of fact, many countries are experiencing the problems of an ageing population and have taken measures to try to influence their birth rates since these affect pension system and standard of living[2]. If a country succeeds in setting an optimum level of population, then their people will have a better quality of life due to an increase in services, infrastructures, incomes. But there are still many implications on the public finance side. One of them is a redistribution issue: if maternity and housing benefits will be provided with taxation then people who are not keen on having a child (because they don’t want or they cannot) will subsidize the couples with a parenthood willingness. Another question would be: is it better to offer cash transfer in order to pay children stuff or to provide in kind services as healthcare and nursery? It’s clear that this phenomenon involves all of us, besides the weak economic framework that is triggering our society by a decade. Roughly speaking, the decision of having a child affects also the ones who do not.

Many weird proposals had been already thought such as giving a flyer about how to flirt (South Korea), divulgate fairytales (Japan) or invite couples to take a holiday (Denmark)[3] but in the meanwhile, population continues to age, affecting all welfare state and above all social security and pension system.

Thus “fertility” may be not a public good, but rather a public concern.

[1] https://www.theguardian.com/commentisfree/2016/sep/05/italys-fertility-day-posters-sexist-echoes-of-fascist-past

 

[2] http://www.oecdobserver.org/news/archivestory.php/aid/563/Can_governments_influence_population_growth_.html

 

[3] http://mentalfloss.com/article/33485/6-creative-ways-countries-have-tried-their-birth-rates

 


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Brazilian Assistance Program for Low-Income Households: Bolsa Família

In Brazil, there is a government national program that aims to help low-income households and it is called Bolsa Família. According to the government, the purpose of this program is to transfer income to households living in poverty. They need health, nutrition and education assistance. The amount paid varies according to the number of household’s children and is due always to the woman of the family. Children must be less than eighteen years old and the amount varies with age also[1].

As a way of controlling who receives the aid, the government linked the payment to children’s school attendance as well as to vaccination records. For instance, if the children do not enroll in school, the household will not receive the money. In addition, it is necessary to keep personal data up to date in government registering system. Moreover, Bolsa Família groups a lot of poverty assistance national programs, that used to provide resources such as LP gas, food and school supplies. In Bolsa Família, all these aids and incentives were unified[2].

Several studies have shown that Bolsa Família program had been benefical for Brazilian population. Researchers have found that school attendance and the number of children approved in school increased and school abandonment was reduced instead[3].

Besides that, researches recently showed that violence reduction in State of São Paulo could be related to Bolsa Família. The authors point is that this program reduces income inequality and promotes increased low-income children attendance in schools. But critics disagree, because they argue that there are many other variables that interfere in violence[4].

Even though some studies have demonstrated benefits from Bolsa Família, there is a national discussion about the effective impact of this program. Have this program reduced income inequality in Brazil? Ricardo Paes de Barros, who idealized Bolsa Família, highlights the combination of this social program with others in Brazil. Income inequality fall occurred because formal job increased in poorest social layer, as a result of educational programs such as government financing of university tuition[5].

Another critical point is: who should receive this aid? Ricardo Paes de Barros says that government still have to improve in this area. Indeed, households just have to inform their income and there is no double check by the government. This is the main reason why part of Brazilians complains about Bolsa Família. The governemnt do not have a formal validation on income data, which facilitates corruption and income transferring for non-qualifying households. Correcting that is not a difficult task since government have enough data about it. Nowadays, this program is used as a political promotion by politicians. Almost all candidates stand up for this program as if Bolsa Família were the unique way to solve all the country’s problem of inequality.

[1] Bolsa Família is managed by a state-owned bank called Caixa Econômica. All operational guideline about this program was obtained in Caixa Econômica’s website: http://www.caixa.gov.br/programas-sociais/bolsa-familia/Paginas/default.aspx
[2] Source: http://www.mfdr.org/sourcebook/6-1brazil-bolsafamilia.pdf
[3] Source: http://cepea.esalq.usp.br/pdf/Cepea_ImpactoBolsaFamilia_Premio.pdf
[4] Source: http://oglobo.globo.com/brasil/bolsa-familia-reduz-violencia-aponta-estudo-da-puc-rio-5229981
[5] Source: http://exame.abril.com.br/revista-exame/edicoes/1114/noticias/bolsa-familia-sozinho-nao-resolve-problema-dos-mais-pobres

Gabriela Rodrigues