quinta-feira, 14 de outubro de 2010

Is the VAT increase the best option?

These last days we have watched the two main Portuguese parties brandishing arguments about the announced tax increase on the 2011 State Budget. The party of the Government (Socialist Party – PS) defend the Government intentions to increase the VAT and the principal opposition party, the other party of the governance rotation (Social Democratic Party – PSD) manifests their opposition to any tax increase.
We cannot make believe that it is available any other choice except rising the taxes because it is not. We have no option to the tax rise and so the PSD is incurring on a serious mistake trying to impose against it as a condition to the Budget approval. However the Government position is not the right one too.

The VAT rising is a much more pleasant action for the Government because people are more sensitive to Personal Income Tax raises that to the VAT rise. For the Government another vantage of choosing the VAT is because it has more immediate effects but exactly because of that it should be saved as a last resort option. In reality the VAT is a more social unjust tax and economically inefficient one too so the VAT rise should be used only in temporary emergency cases.

Let's explain it using a practical example; a family with a mensal income of 1.000 Euros have no capability of saving anything at the end of the month so the family disposable incoming (incoming after already paid the Personal Incoming Tax) will be completely rated by the VAT and we cannot say that the 23% VAT is only applied to luxury products because there are lots of products that have a 23% Vat and are not luxuries.
In the case of a family with a mensal income of 3.000 Euros they will have some capability to make some savings at the end of the moth and because of that the VAT increase will not affect the totality of the family income.
Therefore a family with an income of 1.000 Euros will have a proportionally higher increase of their taxes than a family with an income of 3.000 Euros.
Then is easy to understand that a rise on the Personal Income Tax is much more fair that a VAT raise because we can adjust the tax rise to the different income levels.

We also have to considerate the fiscal geographic injustice. The taxpayers who live along the border with Spain have the option to choose between making their consumes in Portugal or go making them in Spain at lowers VAT rates. This way the Government is promoting a fiscal injustice, losing a significant amount of tax recipes from those regions and is stimulating the citizens mobility to the border regions.

Other question is the negative effect on the exportations caused by the loss of competition of Portuguese companies on the external markets in consequence of the VAT increase and thereby increasing the gap between Portugal and its competitors.
Subsequently with the drop of Portuguese competitiveness and the decrease of families consume because of the cutback of the disposable income, the economical activity will decline and with it the reduction of the public tax recipe what will conduce to the deficit aggravation.

After all those points it’s clear that is more efficient to the economy and to the public finances the rise of the Personal Income Tax, the increase of taxes that fall upon the consume of houses and cars above a certain value, the luxurious products are more insensitive to the price increase as it proves the last years data, the rise of the property, the tobacco and alcohol taxes and also the end or reduction of several fiscal deductions.

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