Over one-quarter of VAT tax benefits go to the 20% top earners

The Bank of Portugal has warned that reducing taxes through VAT cuts is not the best or only way to foster wealth redistribution in society and that other tax measures need to be included in the mix.

Reduced taxes and VAT exemptions or reductions do have a greater impact on poorer families, but more than 25% of tax benefits in Portugal go benefit high earners according to the Bank of Portugal that says that the average VAT tax in Portugal is similar to that of the Euro Zone countries but with differences according to types of goods and services.

In the article ‘VAT in Portugal and its effect on income distribution’ released on Thursday just before the BoP’s June Economic bulletin, the bank’s economists say that around 43% of consumer goods bought by Portuguese families are subject to to normal taxes, a third have reduced VAT, 15% is exempt from VAT, and 10% has intermediate VAT.

“Given the differential between the rates, 75% of VAT revenue comes from the application of the standard rate and only 14% from the reduced rate,” highlights the Bank of Portugal. The impact of different tax rates varies among families with different income levels”.

The study concludes that because it is applied to a set of essential goods, “the reduced rate has a greater impact on families with lower incomes”, being applied to 37% of their average shopping basket and representing 18% of the VAT paid by these families. However, the central bank economists point out that “even in households with higher incomes, this rate applies to more than a quarter of spending.”