Nova workboard

a blog from young economists at Nova SBE

What the eye doesn’t see, the heart doesn’t grieve over

We are in the aftermath of the Portuguese local elections, nonetheless, our attention is already being needed for one of the major decisions at the country level: the Portuguese Government Budget (OE). Approximately one month separate us from the start of the discussion on the topic. So, in this article, I will recall one of the main debates around the first Budget of the current mandate: the shift in weight of direct taxes towards indirect taxes. The point I will be making is that 1) this change was likely perceived by citizens as a decrease in total taxes paid; 2) the substitutions of revenue from income taxes to consumption taxes decreased the overall distortion of the tax system; 3) the opinion I present in the previous point can also be corroborated by citizens feelings of fairness towards the tax they pay. Hence, this article is presented as food for thought as little (and quite ambiguous to attain) evidence exists.

On the discussion of the OE 2017, one of the main arguments by the opposition for the shift in tax nature, was that it would make the system less progressive. In other words, the government would be substituting a direct tax rate that is higher for the rich and lower for the poor, for an indirect tax that is the same for everyone and people only pay more if they consume more. In this article, we will disregard equity considerations and historical trends of economic variables, namely GDP which influences the tax burden measure (tax revenue divided by GDP), and focus on the public perception of the tax (assumed to be positively correlated with the distortionary power). This said, what happened in those years was that even though the tax revenue increased, public opinion seemed to be of approval of the lower income tax, ignoring taxation on products (indirect taxation).

In my opinion, there are two strong arguments to explain this acceptance rate. First, a lesser perception of the taxes which started to be hidden in the price of products and not well discriminated as in the difference between the gross and net salary. Important to notice that consumers’ perception of increases in price has many flaws, which reinforces why people will ignore the indirect tax. Secondly, considering people were not happy with the policies at the time, one can argue that income tax that people believed it would turn into erroneously spent government revenue was substituted by different consumption taxes pursuing objectives people could connect to, such as, tax on sugar, on cigarettes or pollution.

This shift may induce more support for government spending reducing tax aversion by citizens as defended by Listokin and Schizer, professors at Yale and Columbia Law Schools, respectively.

To conclude, the decision on taxes of the OE 2017, disregarding equity considerations seemed to be popular, what in the context of the current politics was determinant to win the confidence of the Portuguese taxpayer.


João Matias


Author: studentnovasbe

Master student in Nova Sbe

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