Nova workboard

a blog from young economists at Nova SBE

Excise taxes as a useful tool in fighting inequality in today’s politics

On the past decade, Portugal saw a sharp decrease on its income inequalities. Using the Gini Index to measure such phenom, the 2004 – 2009 period was a success in fighting said lack of equity. Nevertheless, preoccupations subsist since 2009. With Portugal undergoing a hard and exigent readjustment program, just after a harsh crisis, the fight against inequalities stagnated, with the typical Portuguese loosing income and wealth.

Nevertheless, one must first ask if inequalities are indeed meant to be fought. As this is an ongoing debate amongst economists, with some advocating for high inequality levels due to e.g. efficiency gains, while others advocate for more equity due to, e.g. a bigger propensity to consume amongst the poorest, I will abstain to enter this debate. Alternatively, I will take the “need to fight inequalities” as a given fact, and recommend the best way to do so, using as a framework today’s Portuguese society, namely its political reality and its tax scheme.

Gini Index Imagem

Although seemingly obvious that progressive taxes are more popular than regressive ones (due to the simple fact that the poor are more numerous than the rich), that is in fact inaccurate. Joel Slemrod proves that there is a large support for regressive taxes in the US, largely due to misconceptions regarding the prevailing tax scheme. Furthermore, Jean Hindriks proves that support for progressive (or regressive for that matter) taxes is quite cyclical and volatile. Thus, a standard approach such as an increase on the wealthier echelon of the Portuguese IRS (tax on labor income) is not ideal for a politician looking for a sure reelection.

Alternatively, it is safer to opt for a more discrete tax on consumption, namely an excise one. Contemporary governments have already carved this path (e.g., “fiscalidade verde” or “taxa turística”). It is naïve to think an excise tax will have a huge impact on redistributing income, but as the current choices are scarce – namely due to the public budget’s current constraints and the necessary deleveraging – these are nevertheless quite interesting options for the current cabinet, not only from a pragmatic, “elections” perspective, but also as a useful tool for reducing in reducing inequalities.

Excise taxes are classically assumed to be regressive. For example, in Denmark, researchers found taxes on CO2 – Namely, those taxed directly to households – increase inequalities, i.e., are regressive, so one must careful when opting for an excise tax as a tool for reducing inequality. Still, there are plenty of examples which help build a case for the progressivity of excise taxes, whether it be on the cigarettes market, or the gasoline one. Using the later examples, and after due and careful study of its consequences, I do believe the current Portuguese cabinet should impose (or increase) similar taxes, such as the famous “fat tax”, or simply increase taxes on liquor, cigarettes, amongst others.

It will not end wealth disparities amongst Portuguese but it is certainly an interesting path, from both a social perspective and a pragmatic, electoral one.

Rodrigo Marçal Camacho | Student no. 30508 | MSc. Economics

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Author: studentnovasbe

Master student in Nova Sbe

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