Nova workboard

a blog from young economists at Nova SBE

‘Solidarity tax’? Flunked!

Back in May of 2010, the Social Democratic Party (PSD) issued a proposal to make mandatory the provision of a so-called ‘solidarity tax’. What was meant by ‘solidarity tax’ was that the beneficiaries, aged between 18 and 60 years, of unemployment benefits, unemployment assistance and social integration income (RSI) provided unpaid work in public or social institutions for 15 hours a week or attend professional training. Furthermore, it was planned the cessation of these benefits in case of refusal. Thus, the “solidarity tax”, was meant to be a sort of ‘counterpart’ of social benefits.

Taking a look at the proposal, it can be seen, by performing a very simple economic analysis, that this measure has some consequences in terms of the individual’s preferences regarding work. On the one hand, if one plots the situation of an individual receiving unemployment benefits but who is not required to do community work (Figure 1), it can be stated that this individual prefers to receive the unemployment benefits instead of working. On the other hand, if one represents the situation of an individual to whom the ‘solidarity tax’ is required (Figure 2), it can be seen that the utility of working is higher than the utility of receiving the unemployment benefits when the solidary tax is mandatory. Therefore, this individual prefers to work instead of receiving the unemployment benefits when the solidarity tax is imposed. As a consequence, the higher the solidary tax (or the higher the hours of community work required), the higher is the incentive to work.

Picture1

Picture2

In terms of creating incentives for unemployed individuals to start looking for a job and begin working, this proposal seems to be more or less efficient. But, of course, there are other important issues regarding this proposal, for instance the role of the ‘welfare state’. According to the Social Democratic Party, “The Solidarity Tax is assumed as an instrument of public moralization,” in a society in which “some people work and contribute, while others often live on the basis of mere expedients or fraud”¹. Although it is known that some individuals live as free riders in society, unemployed individuals discounted part of their salary to have the “right” to unemployment benefits. So, with the solidarity tax, “the social support would no longer be a right”², as the Minister of Labour and Social Solidarity mentioned at the time.

Moreover, in legal terms, this proposal was not considered constitutional, since “a convention of the International Labour Organization (ILO) from 1956 states that it is not legal to require compulsory labor for subsidized unemployed workers” ³ as Minister Pedro Mota Soares explained. Furthermore, this proposal could also be seen as a mechanism of instituting forced work at zero cost, which is also unconstitutional.

Although there were some incentives behind this measure, its weaknesses led to the refusal of the proposal by the majority. Finally, the aforementioned example confirms that public policy must take economic, legal and ethical aspects into consideration.

Joana Samagaio

References:

¹http://www.tvi24.iol.pt/politica/tributo-psd-esquerda-tvi24/1163955-4072.html

²http://www.jornaldenegocios.pt/economia/detalhe/psd_quer_desempregados_a_fazer_trabalho_gratuito_trecircs_dias_por_semana.html

³http://www.dn.pt/bolsa/emprego/interior.aspx?content_id=1574142

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Author: studentnovasbe

Master student in Nova Sbe

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