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a blog from young economists at Nova SBE

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Financing Public Education

Education is one of the most traditional positive externality examples – it generates increases in productivity, GDP and improves standards of living. As a good, it is considered mixed, a public good in some concerns and private in others. Publicly funded education has the fundamental purpose of many other public policies, to promote equal opportunity. But at what cost? It is never easy to make the population understand that they are not paying taxes to fund others’ benefit – but for social, and consequently, their own benefit as well. Such is the case when new technologies
are developed and services are provided with quality, in a well-educated world. [1] And even if we could get this message across to everyone, the question would remain: How much of public education should be funded by taxes, and which?

Prior to being allocated to different projects and regions, public education money, especially for mandatory schooling, has to come from somewhere, and there isn’t yet a consensus about it. Particularly, Europe’s approach to this question differs from that of the United States.

In Portugal, this distinction is not only unclear – it’s unintelligible. The funds used in education expenditure come from the State Budget, which includes all Government revenue, from which a share is applied in this framework. This percentage stays around 4 to 5% of GDP, and its fluctuations that can be explained by electo
ral cycles or macroeconomical ones[2]. Afterwards, funds flow through the beaurocracy until they reach, more or less indirectly, the school groups (“Agrupamentos”), as depicted in the flowchart below.[3]

For the case of the United States, as the administrative system is completely different, there are many diverse approaches across time and space. However, one example is the close link that the property tax has to education funding.

This kind of direct association between sources and applications oftax revenue can bring benefits and pitfalls. For instance, the way a tax on property effects the population may raise equality concerns, and changing tax policy with such direct correlation carries risk for education.[4] Besides, any risk connected to the volatility of the real estate market can result in direct repercussions in such an important part of society. On the other hand, the absence of a direct connection, like in Portugal, limits the ability of policy designers to change any aspect of education funding directly, such as local adjustments and decentralization.

Regardless of the method, it is important to take education as an investment which will have very serious long term consequences in society. Despite needing us to protect it from as many temporary shocks to the economy as possible, its need for funding subjects it, continually, to economic cycles.






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Is Fiscal Federalism Good for Growth?

Fiscal federalism can be broadly defined as the financial relations between different levels of government – central, regional, municipal level, etc. – and the term was firstly introduced by Musgrave (1959). Under fiscal federalism, provision of public goods is decentralised to subnational governments, allowing better-tailored public goods/services to the preferences of a heterogeneous population. Thus, the main question to ask is which task should be assigned to which governmental level, and how it should be financed.

In the recent decades, we have observed a significant effort from countries in implementing policies towards decentralization due to its arguably beneficial effects in economic performance. In Portugal, the decentralization process started with the new constitution, written in 1976, after the reestablishment of democracy. However, this has been a lengthy process and the country is still considered one of the less decentralized European countries. Several reforms have been put in place in order to increase the level of decentralization, under the main arguments of a higher fiscal efficiency and stronger political accountability.

The theory of fiscal federalism is based on the seminal work of Tiebout (1956), whose basic economic arguments in favour of fiscal decentralization rest on two main assumptions. On the one hand, decentralization increases economic efficiency since local governments are capable of providing better services due to proximity and informational advantages. On the other hand, competition and population mobility across local governments for the delivery of public services ensure the right matching of preferences between local communities and local governments. In summary, subnational fiscal autonomy ensures efficient allocative outcomes, which may eventually lead to higher growth rates.

The relationship between decentralization and growth has been technically formalized by several theoretical models, but its conclusions are not clear-cut regarding the actual transmission mechanism.

Empirically, this relation relationship is also ambiguous. Several studies find a positive relation between fiscal decentralization and economic growth, while other studies fail to find any relationship, and some even identify a negative one. The reason for these discrepancies in results is mainly related with the measures of fiscal decentralization that vary across studies.

Even without a strong empirical evidence to support, the trend for both developed and developing countries has been to fiscally decentralize. In Portugal, the main step towards decentralization was made in 1989 with the introduction of a property tax (Contribuição Autártica), whose revenues were fully managed by local governments, who had also discretion in setting the property tax rate. This measure intended to increase local fiscal autonomy by enhancing their source of fiscal revenues, increasing their political accountability and decreasing the reliance on financial transfers from the central government. However, the process has not been immediate and, currently, it is far from been finished. Even after several reforms, Portuguese local governments are still on the process to be autonomous with the most important source of revenues still being transfers from the central government (more than 20%).

 Catarina Alvarez



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Taxation on alcohol: decreasing society’s burden and increasing welfare

According to the World Healthcare Organization (WHO) estimations, Portugal is the 11th higher consumer of alcohol per capita in the world. You may consider that drinking is part of the Portuguese “life style”, and that it is a cultural matter that we should stay out of. But should we?

In 2013, of all Portuguese deaths, 2.2% were attributable to alcohol consumption. Moreover, there is a health, social and economic burden borne by the society due to the harmful consumption of alcohol: (1) direct costs in health, police, criminal justice, unemployment and welfare systems; (2) indirect costs due to loss in workforce productivity; and (3) intangible costs like diminished quality of life of drinkers and the people linked to them. Broadly, it is estimated that the cost of alcohol to society, on average, in high-income countries, is 2,5% of GDP.

However, we should preserve the health benefits of the moderate alcohol consumption. So my kick off question is: is the Portuguese population drinking moderately?

According to the 2014 report, “A Situação do País em Matéria de Álcool”, the consumption of alcohol per capita in Portugal is 12,9 litres of pure alcohol per year, which is above the 10,9 average of Europe Region WHO. This suggests there is a drinking problem in Portugal that needs to be tackled. Moreover, a major concern is the harmful alcohol consumption of young adults. Youth evidenced 18% of binge consumption against 12% for all consumers. Same figures apply to severe intoxication (11% in youth against 6% in total population), being the 15-24 years-old the group with the highest prevalence. In addition, 46% of the 15-24 and 48% of 25-34 years-old consumes six or more alcoholic drinks in one occasion, which are the highest rates amongst all the decennials.

Therefore, there is a call for policy actions to tackle the behaviour of consumers, particularly young adults that might be endangering their future.

My suggestion to address this issue is increasing the taxation over alcoholic beverages, supported by the research “The Effectiveness of Tax Policy Interventions for Reducing Excessive Alcohol Consumption and Related Harms”, American Journal of Preventive Medicine. This research suggests that raising alcohol taxes is an effective strategy to reduce excessive alcohol consumption and its harms. Furthermore, it also suggests that the impact of a tax increase will depend on factors such as disposable income and the demand elasticity (how consumption changes with changes in prices) for alcohol. On this matter, “The Effects of Prices on Alcohol Use and its Consequences”, Alcohol Research & Health, found that youth is more responsive to price changes than the general population (an increase in the price of alcohol will decrease the consumption of alcohol in youth more than in the other groups, exactly what we want!).

As you can see in the statistics presented first, Portugal is struggling to reduce the harmful consumption of alcohol. Together with the previous arguments that the tax can decrease the consumption of alcohol, I believe that the optimal tax, which maximizes wellbeing and diminishes the cost of drunken people and their actions to the society, is higher than the tax in place right now.

Concluding, we should increase the tax on alcohol closer to the optimal tax!


Patrícia Sofia Pinto e Filipe 

Master in Economics – Public Finance

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Why can’t we set the right fuel price?

Every week all of us, especially drivers, hear news about relative changes in the price of the different types of fuel. These adjustments are perfectly normal. Although, this topic is sometimes subject to some discussion and differences of opinion.

As Portugal is one of the European countries with the highest tax burden in fuel [1], then some drivers, especially residents living near the border between Portugal and Spain, and workers from transport companies tend to fill in their deposits in Spanish stations. Obviously there are consequences arising from this issue, namely the shift of consumption from one country to another and the loss of tax revenue that the Portuguese Government would receive from such taxes – in 2007, under other economic circumstances, Deloitte predicted that the shift of consumption to Spain could lead to losses of 84 million Euros [2].

This March, the Portuguese Minister of the Economy requested people living near the border to stop filling up in Spain, once by doing so, they would be paying taxes there instead of in their country, which would not be positive for the Portuguese public accounts [3].

But where does the difference in prices comes from? In Portugal, to the market value of fuel, are added the values of VAT, ISP (Imposto sobre Produtos Petrolíferos), the carbon tax, an extra biodiesel cost and some other contributions [4] in such an amount that, on average, fill in a 60 liter deposit becomes, cheaper in Spain by fifteen Euros [5].

The fact that the prices of fuel in Portugal are so high in comparison with other European countries, have a negative impact both on families (especially the lower income ones), and on companies, which use fuel for their businesses.

Thus, which measures can be discussed to improve families and companies’ situation, while at the same time allowing the country to keep receiving tax revenues?

Once fuel taxes impose a greater tax burden in the poor, as they are regressive taxes, the decrease of the price of the fuel could be very pertinent especially for those lower income families. Such measure would allow them to have more disposable income which could be spent in other consumption goods, increasing Government’s revenues with other taxes.

Moreover, from the companies’ perspective, several measures were already approved by the Government, like the partial tax refund in professional diesel for some companies in four gas stations near the border [6]. This policy, if extended to the remaining country, creates incentives for companies to respond to the minister’s appeal and not shift consumption to Spain. As companies would reduce their variable costs, they would become more profitable (and more competitive) leading to greater income taxes for the Government. For the same purpose (or alternatively), a specific lower-priced fuel could be produced for other economic activities, like the green fuel was created for agricultural purposes.

This issue is likely to keep under scrutiny as long as the three sides – families, companies and State – are not fully satisfied with the policy results.

Miguel Madeira, nº 3117


[1] Prado, M; “Impostos atiram Portugal para os cinco países com a gasolina mais taxada da Europa”; Jornal Expresso em 04/02/2016;

[2] Estudo Deloitte feito para a APETRO; Artigo de Opinião nº 44; Junho de 2007;

[3] Delgado, H; “Ministro pede a portugueses para não abastecerem em Espanha”; Diário de Notícias em 11/03/2016;

[4] Inf. 26 do Website da APETRO; “A evolução da fiscalidade sobre os combustíveis desde a liberalização do mercado”; em 03/11/2014;

[5] Malhão, M; “Combustíveis: abastecer em Espanha rende 15 euros num depósito”; Diário Económico em 14/05/2016;

[6] Ofício Circulado N.º 35.060, 2016-09-13; Autoridade Tributária e Aduaneira



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The Government Role in Innovation: Incentives and Challenges

The Noble laureate, Michael Spence, defended back this month that the “problems confronting the world economy will require action by multiple actors – not just central banks” ( The monetary policy as gone as far as it can go expansively but “unfortunately, governments did not go nearly far enough in pursuing complementary fiscal and structural responses” and are too focused on easing the debt pressure. In fact, governments have high incentives to maintain the status-quo but it should be appropriate to discuss the role of the government “to spark innovation”! Web Summit arrives this year to Portugal, a forum that lumps “more than 50,000 tech CEOs, founders, startups, investors and political leaders driving change across the world” ( ) to discuss some of the newest technologies, it would be stimulating to see all these entrepreneurs discuss the importance of non-incremental innovation and the importance of the government to foster innovation within himself and outside!

The mainstream thought is that “the state should play a little role in the economy” ( and have nothing to do with the market. But as stated above the market presently hasn´t been capable of creating economic growth. The privet sector has highly incentives in investing in incremental changes however when it comes to breakthrough innovation the incentives are reduced. The type of investigation that leads to breakthrough innovation doesn´t have immediate results and that´s why the state has to invest. The problem is that these investments are highly risky and for one that is successful there are another ten that don´t succeed, and for the public opinion the former have more height, that´s why governments tend to maintain the status-quo. While the private sector can compensate the loses of a bad investment with the profits of a good one, the public sector only benefit from the successful ones is normally the social welfare increase, unfortunately, people don´t perceive it very easily so it would be a good idea to increase the direct benefits from the investments, for instance, the government could demand a royalty from a certain successful investment in order to leverage the bad ones.

Many others can argue that the economy sector that needs more innovation is the public and that it is difficult to drive innovation within this sector, however a study from the Harvard Business School state that “Breakthrough innovation in government is possible”. Since the profit and competition aren´t present other conditions need to be achieved for innovation to be possible: the ability to experiment and to sunset outdated infrastructure. The private sector doesn´t have problems in experimenting because all they have to do is put the new product in the market and see if it survives, while the public activity isn´t drive by competiveness and it makes very difficult to produce data necessary to explain, for example, a new technology to the public. Furthermore, replacing the outdated infrastructure is immensely difficult because it has a huge impact at people life’s and therefore at the pools, and so the Politian’s are reluctant to promote breakthrough innovation that can achieve structural changes.

“One thing is clear: the current approach suffers from serious shortcomings, largely because it socializes the risks and privatizes the rewards”, and in a time that public policy can make a difference in allowing the economies to finally growth it is absolutely necessary to discuss how to create the right incentives to promote government innovation.

João Gonçalo Silva

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Government transfer’s drawback: evidence from Italy

Governments in developed countries have recently enacted several legislations aimed at encouraging people to spend. From tax reduction to government transfers, several manoeuvres exist to enlarge people’s disposable income and to reduce the poverty rate in the country[1]. However, depending on the characteristics of the citizens, every government should implement ad-hoc policies, focusing on specific group of people/sectors and considering the health of the period of execution.

Since 2014, the left-wing Italian Prime Minister Matteo Renzi has intended to support mainly the low-income families by first implementing tax cuts (e.g. abolition of property-tax on the first residence), then by greasing the job market mechanisms (“Jobs’ act”) and finally by providing tax-bonus to the lower part of the people’s income distribution. The latter, i.e. the tax-credit reform, has created particular interest in the public debate because of its high cost (approximately 10 billion euro per year[2]) and unclear effectiveness. It consists in giving €80- monthly in cash benefit to families with income below €24,000 annually.

In the Country Report Italy 2016, the European Commission has analysed the impact of the 80-euro bonus on society and employment. For what regards the impact on “tax wedge on labour” (ratio between taxes attributed to labour to employment income), data have suggested a decline by 2.3%, on average. Ceteris paribus, household disposable income has increased by around 1.1%. Moreover, as we can see from the table below, positive effects has appeared on poverty rates.


Impact of the EUR 80 tax credit on poverty rates. Source: European Commission, Joint Research Centre, based on the EUROMOD model, Country Report Italy 2016, pag. 62.

Nonetheless, similarly to what happened in the 60s in USA, when Milton Friedman failed to consider the changing behaviour of people (“negative income tax”) [3], some unexpected drawbacks have risen in Italy as well. Particularly, regarding the implementation of the 80-euro bonus, people have saved more than how much the government had expected ex ante.

Being afraid of losing, likely precarious, job and perceiving tax credit as an increasing tax burden in the future, poorer households have changed their minds with respect to the pre-crisis period. Their propensity to consume has been reduced[4]. That it, when their disposable income grew thanks to the transfer program, in proportion they had more saved than spent the additional credit. In my opinion, one possible solution to avoid this unexpected phenomenon could have been to impose constraint on how and when spending the transfer. Presumably, providing poor families the 80-euro benefit in form of selective (e.g. on subsistence goods) and expiring coupons, rather than in cash, might improve the outcomes of the reform.

To conclude, especially during crisis periods, people entitled to receive a government transfer can behave differently from what policy makers had designed the program for. With in-kind transfer rather than cash, people would be forced to spend the additional money on subsistence goods instead of mostly save them.


[2] Country report Italy 2016, European Commission.

[3] Milton Friedman failed to consider the possibility that people undertake adaptive strategies to get on and stay on the dole whenever possible. Source:


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Belgian traffic congestion tax

Many residents and foreigners are annoyed by the traffic congestion in Belgium. A survey in 2014 of Inrix revealed that the two biggest cities in Belgium, Antwerp and Brussels, are the most congested cities in Europe and North America. They measured the total hours wasted in traffic in the peak hours of the day between 6 and 10 a.m. and 3 and 7 p.m. In Brussels people wasted about 82,9 hours each year and in Antwerp 78,1 hours. The main reason for this is that jobs are concentrated in the city centre and people don’t want to leave their home town to live there. There is also a so-called ‘anti-urban’ mentality because they want a detached house with some green space around. The Belgian government wants to do something against this problem and elaborated a plan consisting a tax per kilometre ridden on the Belgian roads. However, this plan is not approved yet.

How does this tax work? They do not only look at the kilometres you cover. It is a smart kilometre tax. It is a combination of several factors including the mileage but also type of the road and moment of the day (stringent during rush hours). The costs have not been fully determined but there is reported that they want 9 cents/kilometre in city centre, 4,5 cents on the highways and 6,5 on other roads. Of course, it also depends on the moment of day which can entail an extra cost. In addition, driver must purchase a small device who can measure the driver’s activities which is a cost of €250.

Driving has a cost for the Belgian government such as wear and tear of the roads, infrastructure and environmental problems due to the emission of CO2. By limiting traffic, lots of these costs could be declined and it would result in less accidents. This tax measure would be a shift from owning a car to using a car. Think of elderly people, young people and city dwellers who have less intention to use their car. It could also stimulate use of car sharing. This measure would also force foreigners to pay for the maintenance and road infrastructure. In 2016, the government introduced a tax for trucks and the yield of this measure was €181 million that they could invest in a cycling network or adding to the government’s budget. A study of Stratec also revealed that, by introducing this tax, there would be 10% less traffic in Brussels.

There are some difficulties and disadvantages by introducing this tax. Many employees nowadays have a company car and therefore the costs would be passed on the employer who will have to bear this additional burden so for these employees there will be a little change in behaviour. The economic burden of this tax could affect the competitiveness of the Belgian companies. Another disadvantage is that people who live at the countryside should make the largest contribution and this would be a great cost for them with a decrease in purchasing power as result. The low yields for the government is another issue. According to a report of the Flemish minister of mobility Weyts, [1] the yields of this measure would be only €135,9 million annually. But in this case, this tax should be considered as a mobility measure to relieve traffic in busy cities.

However, the Belgian minister of mobility Bellot is not fond of this plan. His said that this would make living at the countryside impossible. But early September, the European Commission announced that in the long-term all countries must introduce a mileage charge according to an article on Let’s see who keeps the promise!

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Flemish government gets 200 million less than expected

Flemish government gets 200 million less than expected

Friday, 23/09

Yesterday, a report from the Belgian federal budget authority leaked. It stated that suddenly, the federal government has to save 1.8 billion euro more than was anticipated in the previous report in July, in order to keep the country’s budget on track by 2017. This means that instead of the forecasted 2.4 billion, the Belgian government has to look for 4.2 billion euros now.

The reason why the previous estimations were so poor are the following: because of the Brexit, economic growth will be only 1.2% instead of the forecasted 1.5%, which has of course implications on the tax revenues. Also the fiscal revenues of the changes in fiscal policy like the increase in withholding tax (from 25% to 27 %), advances on taxes, VAT increase on electricity, and excise increase on alcohol and tobacco will be lower than expected. This leads to an overestimation of the fiscal revenues of 900 million euros. Another important reason for the deficit being larger than expected are the index adjustments on the social security payments to the unemployed, the sick and the pensions. Together with the health care budget being a lot larger than expected, and other various expenses,  this leads to an underestimation of social security expenses of 700 million euros.


This gap of 4.2 billion euros ensures that the federal government will distribute 200 million less than expected to the Flemish government. This has major implications on its policy, since the Flemish government was planning –after several years of saving- to invest a lot of money in education, health care and R&D. The aim of the Flemish minister-president Geert Bourgeois is to obtain a balanced national budget in 2017, but in order to that, in combination with the planned investments, they have to face a gap of 560 million euros. The question is; where will this money come from? There isn’t a lot of time, since Bourgeois has to come up with a solution before Monday (26/09), because then, the ‘September Statement’ takes place (annual speech from the Flemish minister-president to the members of the Flemish parliament, where the guidelines of the policy for the following years will be discussed). To be continued on Monday…

Tuesday, 27/09

There were rumours that the Flemish government would intervene drastically, with a change in the policy of service vouchers (reduction of the fiscal deduction, an increase in the cost price, or a restriction on the amount of vouchers), or in the worst case, a tax increase. They solved the matter however rather simply. By spreading the planned investments in hospitals over time, the Flemish government found over 330 million euros. This combined with a couple of smaller savings (e.g. abolishment of the tax benefit for roof insulation), the deficit decreased from 560 to 172 million euros. “We’re on the good track to reach a budget balance in 2017”, Bourgeois testified after the ‘September Statement’. Consequently, the investments in education, health care and R&D can continue without adjustments, with no implications on the budget deficit.


Cédric Bauwens 3056

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Hidden Taxation: Out of Sight, Out of mind

Economic theory often relies on many assumptions. These assumptions may very often be at odds with real world behavior. For example, economists often portray humans as homo economicus; a perfectly rational, self-interested human who always behaves optimal to achieve a subjectively-defined end (sounds almost like a psychopath). However, most people are not homo economicus, most people are simply homo sapiens (which ironically is Latin for “wise man”). This fact is important to bear in mind when considering the effects of taxation on behavior. People do not fully optimize their decisions with respect to tax policies. Moreover, people are often inattentive to tax policies, which often are complex and nontransparent in practice.

In an interesting paper posted in the American economic review the effects of tax salience is investigated. Tax salience refers to the visibility of the tax-inclusive prices and how this affects economic behavior. Using a field experiment in a U.S. supermarket the researchers manipulates the visibility of the tax-inclusive price on a set of consumer goods. This is possible since the U.S. sales tax is added to the bill at the register and not shown on the price tag. In addition to the field experiment the researchers estimates the effects on demand of changes in the tax-inclusive price due to both direct product price changes and changes in the sales tax rate.

According to standard economic theory the unveiling of the tax inclusive price on the price tag should not affect demand as the price of the good in reality is unchanged, at least for the cyborg Homo Economicus. Moreover, the behavioral response of Homo economicus to a change in the tax-inclusive price should be independent of whether the change is due to a change in the direct product price or a change in the sales tax. So, how does the quite ordinary homo sapiens behave?

The researchers find that the demand decreases when the tax-inclusive price is unveiled. They also find that people generally underreact to changes in taxation compared to direct product price changes, when the tax is not directly observable. This is not what the homo economicus predicts. There are especially two explanations to why we observe this behavior. First, people may not be well informed about the tax or tax rate. Second, the salience of taxation matter. Even though their results may be just a freak accident it seems to be some truth to their findings and most people will probably feel familiar with the results.

These results of the effects of hidden taxation have several important impacts on public policy. Because people don´t always know what they pay in taxes politicians may be incentivized to raise taxes, potentially harming the consumer. Another implication is how this kind of hidden taxation may be used to introduce less distortionary taxes. However, there are clearly some ethical considerations that should be taken into account as most people would very much like to know both what they are paying and to whom.

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Tax Evasion

Early April 2016, about 12million documents containing private financial information were leaked by the ICIJ[1] from Mossack Fonseca, a Panamanian law firm. The documents contained information on more than 200,000 offshore entities worldwide. The case became known as the Panama Papers[2]. In Portugal, this was not the first time the issue of tax havens, money laundering and offshore accounts invaded public opinion. In Portugal, the “Operação Furacão” (2005) had already caused some fuss, and in its sequence the well-known “Operação Monte Branco” fully exposed the issue to the public. But how big is the problem of tax evasion and which are its main sources? How are authorities (in particular in Portugal) dealing with the issue? These are the questions we try to briefly address in this post.

In his work “The Hidden Wealth of Nations[3], Gabriel Zucman, a Berkeley professor, argues that 8% of the world’s wealth is kept offshore with purposes of money laundering and tax evasion (only undeclared money), representing around 190 BUS$ in tax revenue loss. This is a way how rich people evade taxation (they’re the ones with wealth to hide). The biggest problems – besides tax revenue loss – with offshore accounts and tax evasion by the rich are related to the inequality issues it brings to the table. The unfairness of the rich not getting their income properly taxed while the poorer get, and the implied failure of the redistributive mechanism (the wealth does not trickle down) is a severe problem.  It is of crucial importance to state that this is not the only source of tax evasion. Undeclared economic activities and black markets also take an important role in the problem and the responsible agents are not only the richest.

As for Portugal, according to Zucman, 37% of the country’s wealth is located offshore and recent studies by the OBEGEF[4] reveal that parallel economy accounts for 26% of the GDP. It accounts up to five national budgets destined to the National Health System[5].

On the one hand, the Portuguese authorities and government have been taking proactive measures to tackle the issue. The Strategic Plan to Reduce Tax Evasion and Fraud[6] stresses the legal obligation to issue receipts in all economic transactions, allied to the creation of the “e-fatura” platform and continuous cross-checks of the data. The legal possibility to deduct expenses in critical sectors of undeclared activity such as mechanics, contractors or hairdressers and tighter controls to firms as to avoid “under the table” payments and compensations to their employees are some of the measures being rightfully implemented.

On the other hand, it is in the financial side that still lie the biggest flaws. The overly time-consuming procedures of the judicial system (took 10 years for the first “Operação Furacão” trial, and “Operação Monte Branco” case is dragging) eventually lead to expiry of the cases and no consequences for the criminals. Tighter capital control (including bank accounts checking) is on the table but brings up very important considerations about privacy violation.

It is crucial that government continues to tackle this situation, making justice more efficient, designing mechanisms to avoid undeclared capital outflows and stress economic activity control, but is also important a public awareness effort such that each citizen understands his own importance and does not contribute to the problem, even if short-term individual benefits seem obvious.

Filipe Bento Caires


[1] International Consortium of Investigative Journalists;



[4] Observatório de Economia e Gestão de Fraude;



Other reference:

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Italian citizens are stuck in the gasoline puzzle

Since early 70’ Italian citizens have been suffering from one of the highest gasoline cost of the entire world and, after the powerful earthquake that hit the central region of the country one month ago, a new rise in the excise taxes on oil is considered almost sure by many opinion makers.

Compared with Germany and France, the major European economies, Italian gasoline’s cost for consumers is 10.7% greater: 1.31€/l for both German and French people versus 1.45€/l for Italians (data from are referred to the 20th June-26th September 2016 period on a weekly basis). Such a high level in oil price is due to a fierce taxation system, mainly on the excise side. Nowadays, the Italian excise duty for leaded petrol product accounts for 0,7284€ per liter according to EY “2016 Global oil and gas tax guide”. Throughout Italian history, governments have used the excise on oil to collect money, easily and rapidly, in order to cope with exceptional circumstances or natural calamities or wars, too. For instance, taxpayers are still paying excise for the Ethiopia campaign of 1935.

On one hand, oil producers, who bear legally the excise, face no troubles in shifting the tax burden to gasoline users. On the other side, Italian consumers can hardly subtract themselves from this huge excise incidence. In fact, oil is Italy’s most important energy source (according to

A possible explanation on this inelastic demand may rely on the inefficient infrastructures and transportation systems. Looking at OECD 2015 data, Italian investments in inland infrastructure, a key determinant of performance in the transport sector which include both spending on new transport construction and the improvement of the existing network, is only 0,40% of the GDP. This data is consistently low comparing to the 1% on the total GDP spent in a country as France, and to the German expenditure over GDP, which is around 0,60% (source:

Thus, when a new excise is introduced, consumers who use gasoline to reach their work place by car, could barely change their behaviour and start using an alternative mean of transport, like train, bus or metro. Perhaps those citizens who reside in metropolitan city, namely Milan and Rome, will start going to work with bicycle if there would be cozy and safe cycle paths developed as in Netherlands. Again, the main concern for Italians is a lack of substitution effect which could break up this stuck situation.

Focusing the attention on a long-term perspective, Italy 2015 investment level in renewables has been 33% less than German level (source: and the trend is steepening in the last three years. Nonetheless Italian investments in renewable sector is, quite surprisingly, the second one regarding the European Union, slightly higher than Sweden. So if Italian governments will do the necessary investments in both infrastructures and renewables, the next generations might be able to quit from the gasoline puzzle and, who knows, maybe excise duties on petrol will be used in a better way: as incentive to choose the “green way” in spite of polluted one, no more to raise money quickly.


Andrea Zilio

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Taxing plastic bags in Portugal


Single-use plastic bags in Portugal used to be handed out for free in every supermarket. In February 2015 a green tax was imposed on these bags and they started costing 10 cents of euro. At the time 466 bags were used per person a year when the European average was of 198.

Despite this abnormal number revenue from the levy was a budget fiasco. The government, accounting with the drop in consumption due to the tax, was expecting to raise 40 million euros but by the end of the year it had collected as little as 1.5 million euros.

Besides raising revenue, a green tax aims to influence consumers’ behaviour. Here this tax appears to have had the intended effect: the use of plastic bags has plummeted. Portuguese people now use nine thin bags per year. More than 18 months after this policy was put into effect only 9% of the big retailers use these bags. This figure was of 74% before the tax.

However, in these big retailers stores a great deal of plastic bags is still being sold and bought everyday, just not thin bags. On the day that bags started being taxed they stopped being handed out. Instead, big retail stores started selling thicker ones. Only plastic bags bellow thickness of 0.05mm, the ones considered to be reused the least, were subject to the levy.

This was something that the government didn’t seem to take into account when predicting such a large revenue. At the time of the design of this policy, the real consumer of thin plastic bags was not the one considered. This is not the supermarket shopper, but the big retail distributors. The retailer’s demand for thin plastic bags was very elastic, i.e. the price would have a large impact on the demand, because there was good close to a perfect substitute: the thicker plastic bags that were not taxed.

Therefore, the use of discardable plastic bags prevailed and big retailers seem to take the best advantage of this tax. They don’t use thin plastic bags anymore and sell thicker ones to consumers that may, in cases, think they are paying for bags due to the tax.

For an improved policy making, considering similar policies in other countries is crucial. The Irish case is a particularly happy one. In 2002 Ireland imposed a levy on plastic bags and their use was diminished by 90%. According to this study it was a policy “so popular with the Irish public that it would be politically damaging to remove it”. The popularity was own to informational campaigns on the impacts of the plastic bags and on the allocation of the revenue collected. Nevertheless, this policy wasn’t popular just amongst consumers.

According to the authors “ensuring stakeholder acceptance of the tax (was) central to the successful implementation of such a tax”. Support from major retailers was secured in the making of the policy by them having actively participating in its design. In the Portuguese case, the big retailers seemed to act in opposite way of government’s intentions, finding a way around the tax. This might be the reason why the measure didn’t achieve all it could have, whether regarding the large discrepancy between revenue expect and actually collected or the impact in consumer’s behavior. Despite the drop in consumption, plastic bags are still used, just different ones.
Sara Amorim Queirós

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The return of CPMF: possible impacts of a new old-tax in Brazil

Brazilian economy has not been through a good time since 2014. In 2015, president Dilma Roussef presented a possible solution to reduce public debt deficit: reintroduce “temporary” financial transaction tax (CPMF, in Portuguese). Of course, this generated broad discussion all over the country. This tax charges all financial transactions. For instance, if a citizen or a company pays anyone using its bank account (even if it is other tax payment), it must be charged by CPMF. However, CPMF does not apply in wage payments or transfers to the same ownership accounts[1].

For the government, this is a way to generate resources to improve the economy by reducing public deficit. Although, not everyone sees this decision as a good one. In the past, when government adopted CPMF, tax revenue had a significant value and helped in different areas, where public health expenses were the main one. However, at the time CPMF was created (1997), the tax objective was to finance public health only[2].

A recent research shows that population have not seen an improvement in public health during this period[3]. Furthermore, CPMF is a temporary tax. Then, it should not last ten years. These are some reasons that explains why Brazilian citizens are afraid with CPMF coming back.

It is known that the adoption of a new tax should change the financial and goods market equilibrium. Therefore, there is a concern in the market not only about the destination of tax revenues, but also on how CPMF will impact Brazilian economy. When a government charge taxes on goods or services, demand is expected to fall as a reaction to prices increase. How much does this fall depend on demand elasticity? A paper from Brazil Treasury Department highlights that CPMF incidence is reflected in a high elastic demand, which implies that it deadweight losses will be much higher in comparison to tax revenues growth[4].

To companies, CPMF has a relevant impact. Their production costs should increase and the market is retracted already. So, this can lead to a fall in sales. Actually, consumers will face an increase in price of goods in the market. Moreover, they will prefer to pay in cash to avoid CPMF, instead of paying by easy electronic methods[5].

There are discussions among economist too. In one hand, they think that CPMF is a good tax, because of its extensive incidence (everyone who transfers any money has to pay), its instantaneous increase in tax revenues flow (tax is due at the same transaction day) and its evasion barrier (all transactions are reported to Brazil’s Central Bank). In the other hand, economists say that CPMF will charge part of population that have lower income and it will also reduce economy dynamism, since people will avoid to (explicit) get in too many financial transactions[5] [6].

Even though this tax could be a partial solution to some difficulties in Brazilian economy, it’s very important to highlight an economists and citizens common view[6]: do not apply the return of CPMF without taking a cut in public expenses in order to reduce public deficit.


Gabriela Rodrigues



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Environmental Tax Reform: A brief overview.

With the 20-20-20 target in mind, set by the European policy makers for the year 2020, it has never been of such importance for countries to discover ways to reduce pollution while not hurting their economy at the same time. In order to achieve the latter, the European Environment Agency (EEA) came with the idea of reforming the environmental taxation in countries which could consequently achieve a pollution reduction while improving other factors (social, economic,…) at the same time.

So what is an Environmental Tax Reform (ETR)?

An Environmental Tax Reform is by definition ‘a reform of the national taxation system where there is a shift of the burden of taxes from example labour/capital towards environmentally damaging activities such as unsustainable use of natural resources or pollution.’ In sum, with the measure, governments should lower taxes on production capital and raise taxes on activities that are harming the environment. This can be implemented in 3 different ways: First, governments of countries can carry out the ETR in a revenue-neutral way, i.e. leaving total taxes unchanged. Second, it can be carried out in a revenue-positive way, increasing the total tax burden and revenue for the government and third, in a revenue-negative way which is the case when not all taxes have been recycled. Although revenue-positive ETR sounds seductive for governments, it is however advisable to implement the reform in a neutral way, as it would be able to damage a country’s economy when taxes are already high and an additional tax would be levied. Now, how could an ETR ultimately benefit the economy?

A first effect one can describe is the one that the reform is designed to do: reducing environmental pollution. Companies will have an incentive to decrease their waste as to avoid taxes. Additionally, the ETR will have the effect of making various goods and activities (mostly bad for the environment) much more expensive as companies, who face additional taxes, will somehow pass on these cost to the end-consumer. Third, and most importantly, shifting taxes from labor to pollution may increase employment and promote ecological innovation. Why? Companies, after the implementation of ETR, will face less wage-costs and may therefore willing to create extra job opportunities within their organization. For example, a study by the EEA has shown that increasing the price of one tonne carbon dioxide to €68 by 2020 could create 152000 extra jobs in Germany.

A last important effect stems from the extra government funds available by increasing tax on polluting activities. The aforementioned funds could be used to create incentives for companies to commit to innovation such as the development of renewable energy sources and in this way boost eco-innovation.

In sum, environmental taxes have always had the misleading reputation of being an impediment to economic activity while in fact, as I’ve tried to point out in this blog, they can serve as an important and successful tool for boosting employment, innovation and a country’s economy as a whole.


Vincent Caudron

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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 ( 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” ( 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 ( 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 ( 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. ( 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 (, 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” (; 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.