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.