Portugal plans to become a tax-free haven for young people by offering them a decade’s worth of tax breaks. This is to stop a brain drain. The centre-right government of the country wants to reduce income tax burdens on young people over a period of 10 years, including a year when no tax will be due. This plan is unique in fiscal policy around the world.
The initiative highlights the urgent need to reverse a crippling outflow of young workers who leave one of the most impoverished economies in Western Europe in search for better-paid overseas jobs. On Thursday, the minority government led by Portuguese Prime Minister Luis Montenegro unveiled a tax plan that was part of a budget for 2025. Montenegro may not have enough votes in parliament to pass the tax plan. His government’s future will be at risk if he fails.
The Premier is trying to address the combination of high tax rates, low wages, and high housing prices that drive many young adults with high education out of this country.
Joaquim Sarmento, the finance minister, stated on Thursday that youth tax breaks are “a fundamental instrument to achieve the objective of retaining young people in Portugal and attracting them to the country”.
According to the proposal, young workers earning up €28,000.00 a year will not pay income tax during their first year at work. In years 2 to 4, they would be exempt from 75% of the tax due, in years 5 to 7, and in years 8 to 10, exempt from 25%.
The IMF, however, has expressed doubts about the fiscal incentives for youth and warned that the impact of preferential tax rates based on age is “uncertain”.
Miranda Sarmento estimates that between 350,000 to 400,000 young people would benefit from the tax breaks.
Goncalo Mathias, the chair of the Francisco Manuel dos Santos Foundation, stated that it was “absolutely crucial” to stop the emigration from Portuguese universities which had seen a boom in public investment.
He said that Portugal has invested in education but this investment benefits countries such as France and Germany, which receive Portuguese immigrants. It doesn’t make any sense that a country as poor as Portugal, which has benefited from European funds and European Solidarity in the past, would lose this investment to richer countries.
Matias called the tax breaks “sensible” and “balanced”, but added that the government must also do more to help young people get jobs, make housing affordable and reduce red tape.
During the previous socialist government, which lost elections this year, tax breaks were also offered to young people. However, they were only for university graduates. The current proposal would cover everyone under the age of 35.
Montenegro stated in a TV interview on Tuesday, that the government’s plan was “a balanced solution”. . . “than the one we initially had”, a reference he made to the result of discussions with the Socialist Opposition that led him, to reduce the scheme’s duration from 13 years to 10 years.
The Socialist Party’s support of the budget is not assured because it opposes the reduction in corporate tax rates, which is part of the plans of the government.
Marina Costa Lobo of the Lisbon Institute of Social Sciences said Montenegro appeared “very pragmatic and quite moderate” in its haggling over youth tax. If the Socialists do not support this budget, then they will appear irresponsible. They will appear to be rejecting stability by refusing to support this government.
The Prime Minister could also achieve a majority if he received the support of Portugal’s third largest political party, the hard-right Chega.
Andre Ventura, the leader of the party, has praised the tax cut for youths. However he is also presenting himself as Montenegro’s main opponent and lambasting the dealmaking between the Democratic Alliance and the Socialists.
Portugal has always been a nation of emigrants. According to the Emigration Observatory, the number of Portuguese residents who are born abroad is equivalent to one quarter of the 10.6 million resident population. This is the highest rate of any EU country.
In recent years, the loss of young talent has been viewed as a major economic disadvantage. According to the National Statistics Institute, between 2008 and 2023 361,000 people aged 15-35 left the country. This represents two thirds of the total emigrants in that time period.
Portugal has grown despite the exodus in part due to its golden visa program and tax incentives offered to wealthy expatriates. Both are now being phased out. Non-Portuguese nationals will be able to take advantage of the new youth tax breaks. According to the government, the tax breaks for youth will cost the country about €650mn per year.
IMF warns that Portugal needs to fund more public investments while paying off its government debt. The top rate for income tax in Portugal is currently 26 percent. This applies to a worker earning an average wage of €20,000 per year. Earnings between €21,000 to €27,000 are taxed at a rate of up to 32.75 percent.
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