Opposition party hopes to cut youth income tax to a third

Portugal’s largest opposition party, PSD, said on Monday that the personal income tax reduction it is proposing for young people allows for “a reduction of one-third” and wants parliament to vote on how any “excess tax collection” should be used.

On the parliament’s website, the five initiatives on tax reduction that the PSD announced in mid-August and will bring to parliamentary debate on 20 September – four draft laws and a draft resolution – are available and will be presented on Tuesday at a press conference by the parliamentary leader, Joaquim Miranda Sarmento, vice-president António Leitão Amaro, and vice-chairman Hugo Carneiro.

As already detailed, the PSD intends to reduce the income tax bracket for young people up to the age of 35 to a maximum of 15% (with the exception of the top bracket) from 1 January 2024.

“The significant emigration of qualified young people is jeopardising the country’s sustainable future. It is crucial to retain these young people in Portugal (…) With this scheme, and with the exception of the last bracket, the marginal income tax rates for young people are reduced to 1/3 of the current rates, with a maximum of 15% in the penultimate bracket,” the Social Democrats explain in the bill.

The PSD recalls that it already made this proposal in the last budget, but it was rejected by the PS.

This week, Prime Minister António Costa announced changes to the income tax rules for young people, but in a different direction: the government’s proposal stipulates that in the first year of work, there will be total exemption from income tax, in the second year the beneficiaries of the measure will pay 25% of the income tax they would have had to pay, in the third and fourth years they will only pay half and in the fifth year they will pay 75% of the tax due.

The Social Democrats are presenting another bill to guarantee what they call “transparency and democratic application of excess tax revenue in relation to the budget”, which also guarantees the automatic updating of the IRS brackets.

“A situation where taxes are collected in excess of what was budgeted, especially when it is repeated, is a democratic sprain (…) In this sense, the state’s taking of taxpayers’ resources in an amount that exceeds its own needs lacks legitimacy, and it is therefore necessary to regulate this situation,” the PSD argues.

The Social Democrats propose that a parliamentary debate be held, with the presence of the government, whenever there is a “situation of excess tax collection” and that parliament “expressly deliberate on the destination to be given to the amount of this excess” whenever the total collection of revenue from direct taxes and indirect taxes for the central administration sector “exceeds by more than 1% the total of the same revenue forecast in the State Budget for the current year”.

The same law establishes an automatic update of the income tax bracket limits “taking into account inflation and real income growth”, using the rate of change in nominal GDP per worker as an index.

The PSD also proposes, in another piece of legislation, tax incentives for increases in productivity, an area in which it believes Portugal has “a serious problem”.

“Low productivity has various structural causes that justify responses from various public policies, including fiscal ones (…) As an incentive to improve productivity, we propose an exemption from personal income tax and social security contributions on productivity bonuses for performance worth up to 6% of annual basic pay. The exemption applies to all or part of the bonus up to this limit,” suggests the PSD.

The most emblematic proposal announced by the PSD at the Festa do Pontal by President Luís Montenegro – the reduction of the personal income tax by €1.2 billion – has been translated into two initiatives: a draft resolution to recommend to the government that the measure should still be in force this year and a bill that projects identical reductions in marginal rates for 2024 for all brackets, with the exception of the last one.