One of the main conclusions of this study is the finding of a negative impact on productivity and wealth creation due to the fact that Portugal has not followed, in recent years, the trend of most Eurozone and OECD countries in reducing the tax burden on companies.
The normal IRC (Corporate Income Tax) rate in Portugal is 21%, but companies are also subject to the municipal tax (revenue from local authorities) and the state tax that was introduced at the time of the troika.
According to OECD calculations, the effective IRC rate in Portugal is 27.5%, one of the highest in Europe.
The group of economists and lawyers responsible for the study created a model to measure the impact on the economy of a reduction in the effective IRC rate at all levels of 7.5 percentage points (pp) and concluded that this tax reduction would increase GDP (gross domestic product) by 1.44% in the short term (after a period of two years) and by 1.4% in the longer term (after ten years).
And why a reduction of 7.5 pp? Because it would be the size of the reduction that would bring the effective rate in Portugal closer to the European average, Pedro Brinca explained to Lusa.
The reduction in IRC would have a positive impact on investment, competitiveness and even consumption since, in this scenario of a 7.5 pp tax reduction, labor compensation would also increase by 1.79%, as companies would be able to retain and share more profits with workers.
In this research, the authors argue that the loss of tax revenue through the reduction of IRC could be financed through various budgetary compensation instruments, namely consumption taxes, labor taxes, public spending or social transfers.
Thus, the FFMS study leaves three recommendations to the government: a "substantial reduction in the nominal IRC rate", an abolition of the state tax and, also, the consideration of eliminating the municipal tax, creating, in this case, compensation measures for local authorities.
The other major conclusion of this study is that "legislative instability in the IRC code has a negative impact on economic activity".
And they prove it with numbers: "A reduction in the effective IRC rate by 7.5 pp, followed by an increase in the rate by the same 7.5 pp after one year, causes GDP and, mainly, consumption to fall permanently (0.03% and 1.01% in the long term, respectively)."
Pedro Brinca and the other authors of this research recall that the IRC Code has undergone more than 1,350 changes since its introduction in Portugal in 1989.
To promote the stability of the IRC, the study proposes that rules be introduced to discipline the production of tax laws.
These academics recommend "the stipulation of a period for the entry into force of tax rules, sufficiently long to ensure predictability for taxpayers" and also "the mandatory carrying out of economic impact assessments" whenever tax changes occur.
In addition to Pedro Brinca, Afonso Souto de Moura (from the Bank of Portugal), Francisca Osório de Castro (tax law specialist), João B. Duarte (from Nova SBE), Miguel Cortez Pimentel (tax law specialist) and Paulo Núncio, lawyer and current parliamentary leader of the CDS-PP, who helped to draw up the AD's (Democratic Alliance) economic program, participated in this research.
In its Government program, the AD proposes a reduction in IRC from 21% to 15%, at a rate of 2 pp per year, the gradual elimination of the progressivity of the state tax and the gradual elimination of the municipal tax, ensuring, in the case of the latter, "compensation through the State Budget for the loss of revenue for the municipalities".
Read Also:
Madeira. MPT proposes reducing IRC for companies to give better salaries (Portuguese version)
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