The meaning of taxation can vary in different contexts. The OECD developed a definition and system of classification of taxes for consistency among members and easiness of analysis:
“(…) the term “taxes” is confined to compulsory, unrequited payments to general government. (…)”
The need to define taxes is followed by the requirement of stating a structure where different kind of taxes must fit in. And so, the purpose of this post is to discuss the Portuguese Tax Structure.
We can mainly divide taxes into six categories: Taxes on income, profits and capital gains; Social security contributions; Taxes on payroll and workforce; Taxes on property; Taxes on goods and services and Other taxes. In Portugal, the primary State Taxes contain Corporate Income Tax (IRC), Personal Income Tax (IRS), as well as Value Added Tax (VAT). Taxes on Assets like Municipal Tax on Real Property (IMI) and Municipal Tax on Real Estate Transfer (IMT) fall under the Municipal Authorities’ responsibility.
Regarding tax structures itself and according to OECD’s data for Portugal, Taxes on goods and services provide the higher revenue as a percentage of GDP, followed closely by Personal and Corporate income taxes and Social security contributions and payroll taxes. An illustrative comparison can be seen in the following graph.
To conclude this analysis one can observe that the tax to GDP ratio in Portugal, which can be used to measure the size of the public sector (the scale of government involvement in the economy), was below the OECD average from 2000 to 2011, having a ratio of 30.9 in 2000 and 30.3% in 2004, suffering, then, an incremental phase until it arrive to 32.5% in 2008. After that it fell back to 31.3% in 2011.The main observation to draw is that, for Portugal, only revenues from Taxes on goods and services are above the OECD’s average in all time periods. Furthermore, Revenue from personal and corporate income taxes decreased from 9.2% of GDP in 2000 to 8.4% in 2010. On the other hand, the tax ratio for Social security contributions increased from 8.0% of GDP in 2000 to 9.0% in 2010. The tax ratio for Taxes on goods and services was 12.2% of GDP in 2000, suffering an increment 2007 but returning almost to the same level as before in 2010. Finally, property tax revenues kept almost constant in the three time periods.
It is important to emphasize the strong growth experienced by the Nordic European countries (Sweden, Denmark and Finland) that started off with intermediate levels of fiscal pressure in the 60s, and have reached at the moment the highest levels. It is also possible to see that the stability of fiscal pressure has been maintained in countries such as Japan and the USA. On the other hand, Portugal started off of the lowest levels and even though it growth significantly this still justifies the position of Portugal in relation to OECD average. By this, one can believe that the progress of size of the public sector is closely related to the development of the respective country.