Portugal has the third largest gap in the OECD between taxes on capital income earners and wage earners. Taxpayers “blame” high IRS rates
Those with capital gains, as a general rule, benefit from a more favorable tax environment than wage earners. Portugal is no exception to this trend, and is the third country in the OECD where the difference in treatment between these types of income is high, i.e. capital is high to the detriment of work. High IRS rates explain this situation, say tax experts interviewed by ECO, who warn that this dynamic will hinder the progress of wages.
“Governments have always applied a more favorable tax structure to individuals with capital income than those with income from work,” the Organization for Economic Co-operation and Development (OECD), in a recent note dedicated to this distinction, specifically observes. For high income taxpayers.
According to the organization led by Mathias Cormann, the view that capital gains should be taxed more favorably still prevails. This is the details of taxpayer Joao Espanha, from Espanha e Associados, to avoid transferring capital abroad.
Thus, looking only at taxes applied directly to high-income individuals (ie those earning five times the median wage), capital income and capital gains benefit from more favorable rates than ordered in most OECD countries.
Portugal is no exception to the rule. Here, the difference between taxes and social contributions applied to capital and wages is less than 30 percentage points.
In front of Portugal, only two countries appear: only Greece and Latvia are ahead and in favor, in financial terms, with more capital than labor income, respectively, with differences of more than 35 percentage points and 30 percentage points (see table below).
Tax experts heard that this situation is not so much a result of the lower rates applicable to capital income, but rather the result of the IRS rates being higher and these being applied to “very low” levels.
“The Portuguese case makes this analysis more meaningful, taking into account the high, progressive rates applied to labor income, not so much because it is less than half of capital income compared to the situation in other countries. , but because it is more, in income from work, they are very high and to very low levels. applicable,” underlines Rogério Fernandes Ferreira, tax lawyer at RFF Advocados and former secretary for tax affairs.
João Espanha agrees with the numbers and advances: “Although the rate of autonomous taxation of income through capital and capital gains has been gradually increased, since 1989, from 20% to 28%, this rate has been consistent year by year, in relation to income and pensions. Income up to 20,700 euros (approx.). That is, people earning about 2,000 euros per month who live on the income of capital pay the same amount from the IRS.
When those who work pay 20% more in taxes and contributions than those who live on income, the analyst gets an opportunity to question “where is the justice?”
“Some Portuguese people pay effective rates of 45%, but they support 48% of the total IRS income (5% for the rich). But this 5% starts in households with a gross income of about 40,000 euros per year, which means that, for the IRS, those who earn about 2,900 euros per month are already rich. There are,” insists Jono Espanha.
And he adds: “Those who pay so much are not even the rich, as we would have them believe: ordinary rates apply, essentially, only to income from work and pensions, while income from capital and capital gains is, as a rule, a flat rate. [taxa fixa] 28%.”
By the way, in a recently published note, the OECD identifies possible justifications for the difference between the tax structure of capital and salary as the application of different rates or the exclusion of social contributions.
However, if we consider not only the taxes paid directly by individuals, but also include in the analysis the rates of the companies that generate this income, this gap becomes smaller.
The difference, it should be noted, is reduced, but it does not disappear: capital income continues to benefit. At this level, Portugal ranks 11th, ahead of countries like France, Luxembourg and Italy.
A break in pay
This OECD analysis comes at a time when, according to the OECD, studies appear to minimize the difference in question for equality. This is because capital is concentrated in the wealthiest individuals. For analysts consulted by ECO, this gap could contribute to the stagnation of wages in the Portuguese labor market.
“For example, from a gross salary of 3,000 euros, the worker receives around 1,900 euros, but the company’s total expenses are around 3,800 euros. If you receive 3,000 euros per month in capital income, the tax payable is 840 euros, which is roughly 1,100 euros paid by the worker/pensioner (IRS and Considering social security)”, advocate Jono Espanha calculates. It is necessary to reduce the difference in the tax treatment of the categories of income in question, reducing the tax burden applied to work “severely”.
“The bleeding of young brains we are suffering is a result of the excessive tax burden on wages, whether from the perspective of the workers or from the companies, which pay little to the worker. Wages are not rising. As they move up, the government takes it all”, he shoots.
Along the same lines, Rogério Fernandes Ferreira points out that, as it stands, the financial framework for salaries is “very encouraging” and that companies must make “more effort” if they want to offer attractive salaries.
“Portugal, mainly, can retain young workers and experienced and highly qualified workers, and in order to become a more competitive country, especially within the European Union, it is my understanding that it must reduce the disparity in question. Not by increasing taxation on capital income, but mainly by applicable tax. By reducing rates and increasing taxable and labor income brackets,” he opined. However, he leaves a caveat: this relief must be provided “at an appropriate time”, assuming that reducing the country’s debt should also be a priority.
On the other hand, Luis Leon, tax analyst and founder of ILYA, warns that in a country of these sizes, the rates applied to capital income should not be increased, as there is a risk of affecting the Portuguese’s savings in this way. The bad ones.
“Portugal has a capital shortage, and we realize that the capital invested in Portugal comes from the workers. After paying taxes, it is the workers who make some investments and are taxed more. If we add that Portugal has a lower level of savings than the European Union average, what does it mean to increase capital taxation? Is this how we want to encourage savings and improve the productivity of companies?”, asks the inspector.
As part of the state budget for 2024, which is still in the works, a lot of ink has already been spilled about possible cuts to the IRS. The right insists on this reduction and the government has not closed the door, but it is not yet known how much this final financial reduction will be, as other objectives of the administration of Antonio Costa are to reduce the public debt, to rid the country. The platforms of nations owe more.
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