Tax expenditures and redistribution - The case of Portugal

This paper assesses the fiscal and distributional effects of personal income tax expenditures in Portugal using EUROMOD microsimulation and 2022 EU-SILC microdata. We compare the 2023 tax-benefit system with a counterfactual scenario in which each tax expenditure category is removed individually to estimate first-round fiscal, distributional and cost-efficiency impacts. We find that tax expenditures account for almost 40% of personal income tax revenues and predominantly benefit middle-income households, with substantial variation in redistributive effectiveness across instruments. Work-related and pension-related tax expenditures are regressive, increasing inequality relative to the baseline, while family, health, housing and education-related provisions are broadly neutral. The Net income guarantee (‘Mínimo de Existência’) tax allowance, stands out as the only progressive instrument and is the most cost-efficient tax expenditure on both inequality and poverty dimensions. These findings suggest that reallocating fiscal resources from broad-based, regressive provisions towards targeted instruments such as the ‘Mínimo de Existência’ could yield greater redistributive returns.