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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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Author: studentnovasbe

Master student in Nova Sbe

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