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On the impact of a tax shock in Portugal

Author

Listed:
  • Alfredo M. Pereira

    (College of William and Mary)

  • Pedro G. Rodrigues

    (Ministério das Finanças)

Abstract

. In 1999, Cavaco Silva, the Portuguese Prime Minister from 1985 to 1995, proposed a comprehensive tax reform package, which is to this day the basic reference in the tax policy debate in Portugal. A tax shock would consist of 4pp cuts in the corporate income tax and in the firms’ social security contribution rates, and a 5pp reduction in the highest personal income tax rate. These cuts would be financed by combating tax evasion, curbing wasteful public expenditure and, if necessary, by increasing the VAT rate by up to 2pp. Using a dynamic general equilibrium model to evaluate the effects of this tax shock, we find that the long-term GDP gains would be between 0.72% and 2.91% while the effects on lifetime private welfare would range between -0.99% and 0.9%. The efficiency of this tax reform package depends critically on the way the tax cuts are financed to ensure deficit neutrality. Because investment is subject to adjustment costs, to alleviate the long-run trade-off between GDP and welfare, tax policy changes must induce a significant increase in net labor income.

Suggested Citation

  • Alfredo M. Pereira & Pedro G. Rodrigues, 2002. "On the impact of a tax shock in Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(3), pages 205-236, December.
    • Handle: RePEc:spr:portec:v:1:y:2002:i:3:d:10.1007_s10258-002-0012-1
    DOI: 10.1007/s10258-002-0012-1
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    Citations

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    Cited by:

    1. Alfredo Pereira & Rui Pereira, 2013. "Fossil fuel prices and the economic and budgetary challenges of a small energy-importing economy: the case of Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 12(3), pages 181-214, December.
    2. Alfredo M. Pereira & Rui M. Pereira, 2017. "Reducing carbon emissions in Portugal: the relative roles of fossil fuel prices, energy efficiency, and carbon taxation," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 60(10), pages 1825-1852, October.
    3. Pereira, Alfredo M. & Pereira, Rui M., 2014. "On the environmental, economic and budgetary impacts of fossil fuel prices: A dynamic general equilibrium analysis of the Portuguese case," Energy Economics, Elsevier, vol. 42(C), pages 248-261.
    4. Pereira, Alfredo & Pereira, Rui, 2017. "On the Effect of an Increase in the VAT on Electricity in Portugal," MPRA Paper 77594, University Library of Munich, Germany.
    5. Pereira, Alfredo & Pereira, Rui, 2016. "On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions," MPRA Paper 77630, University Library of Munich, Germany.
    6. Alfredo Marvao Pereira & Rui Marvao Pereira, 2019. "Achieving the triple dividend in Portugal: a dynamic general-equilibrium evaluation of a carbon tax indexed to emissions trading," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 22(2), pages 148-163, April.
    7. Pereira, Alfredo M. & Pereira, Rui M. & Rodrigues, Pedro G., 2016. "A new carbon tax in Portugal: A missed opportunity to achieve the triple dividend?," Energy Policy, Elsevier, vol. 93(C), pages 110-118.
    8. Rui M. Pereira & Alfredo M. Pereira, 2017. "The Economic and Budgetary Impact of Climate Policy in Portugal: Carbon Taxation in a Dynamic General Equilibrium Model with Endogenous Public Sector Behavior," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(2), pages 231-259, June.
    9. Pereira, Alfredo & Pereira, Rui, 2017. "The Role of Electricity for the Decarbonization of the Portuguese Economy - DGEP Technical Report," MPRA Paper 84782, University Library of Munich, Germany.
    10. Alfredo Marvão Pereira & Rui M. Pereira & Pedro G. Rodrigues, 2014. "On the Long-Term Impact of a Fiscal Devaluation: An Application to the Portuguese Case," Working Papers 116, Department of Economics, College of William and Mary.
    11. Alfredo Marvão Pereira & Rui M. Pereira, 2012. "DGEP - A Dynamic General Equilibrium Model of the Portuguese Economy: Model Documentation," Working Papers 127, Department of Economics, College of William and Mary.

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