Unfold the IRS Rank and the Reduction of the Tax Burden in Portugal

In accordance with the intentions expressed by the Prime Minister, it will be proposed in the Assembly of the Republic to increase the number of tiers of the Personal Income Tax (IRS). The Government’s perspective will go through the splitting of two specific levels of the table where the general IRS rates are shown, intending to provide a fairer and more equitable taxation for certain income ranges.

According to the legislation currently in force, the IRS levels are as follows:

It is also important to not forget the Additional Solidarity Fee, applicable to incomes above €80,000, which may vary between 2.5% and 5%, depending on whether or not it is less than €250,000 and we can consider the existence of two additional levels of IRS, although with particularities.

The proposed changes are, therefore, the splitting of the third tier (for income between €10,732.01 and €20,322) and the sixth tier (for income between €36,967.01 and €80,882), to which they apply, respectively and within the own level, the same rates. Given the progressive nature of the IRS, the fact that the same rate is applied to the income of each of these rates does not mean that the effective rate is the same at the base and at the top of each. This is because this rate is only applied to the income that is actually included in that bracket, with the part of the income that is included in the previous brackets being taxed at lower rates, thus leading to the effective rate at the beginning of each bracket being practically the same as that the average rate for the previous step, while the maximum rate for each step corresponds to the average rate for that step. For example: a taxpayer whose taxable income corresponds to €10,732.01 will be taxed at the effective rate of 17.367%, while the effective rate of a taxpayer with taxable income of €20,322 is 22.621%, even if they are in the same step.

In light of this explanation, it is clear, from the outset, that the splitting of an IRS bracket into two or more brackets – and provided that it is accompanied by the maintenance of the rates applicable to the lower brackets – will (potentially) lead to all taxpayers included in the echelon subject to splitting, as well as those included in higher echelons, lead to a decrease in the tax burden. And, tending to a decrease in tax revenue, although there is no direct and necessary correlation. It is the natural result of the increase in the progressivity of the tax in question.

But does it make sense to unfold the rates in question?

Theoretically yes, because the two levels that lead to the greatest imbalance are at stake. The lowest, like at its top, a taxable income of almost twice its base, because it includes taxpayers who earn little more than the minimum wage and taxpayers who earn roughly what is the average wage in the country (thinking of income from the Category A), something that seems profoundly unfair. In the case of the other target level, the difference between the bottom and the top is more than double, which increases the injustice even more, despite the fact that taxpayers who earn well above the national average salary are at stake.

In this sense, the stated measures, as they are, will very likely reduce the tax burden for a very significant universe of taxpayers, continuing to follow the opposite path to what was experienced about a decade ago, when the shortening of the IRS brackets led to an effective (albeit necessary) increase in the tax burden on individual income.

Just one note, for which there is no answer: it is necessary, in time, to understand whether these tax relief measures will be offset by others (in terms of other taxes) to ensure the necessary level of tax revenue. If so, we could reach a position of eventual impoverishment of the population, even if accompanied by an (apparent) reduction in the tax burden.

Duarte Amaral da Cruz

Tax Manager