The Golden Age of Tax Expenditures: Fiscal Welfare and Inequality in Portugal (1989–2011)

ABSTRACT

This paper studies social tax expenditures as an instrument of social policy, considering its broader social and political ramifications, particularly regressive distributive impacts, the targeting of social protection and making markets for non-state providers. Using OECD data and government budgets, we look at ‘tax breaks for social purposes’ in Portugal since the 1980s, with a focus on healthcare, educational and mortgage loan expenses. Portugal presents a comparatively high level of TBSP before the Great Recession. Why? Using Portugal as a theory-developing case, the paper argues that in the critical juncture following the late, double transition to democracy and structural economic reform, tax and welfare state developments combined to create social tax expenditures as a modality of targeted social expenditure favouring middle and higher strata. Once in place, a combination of powerful vested interests, obscure policy-making, regressive income distribution and high take-up rate across taxpaying groups obtained a path-dependent outcome, keeping inegalitarian and costly fiscal welfare growing during adverse fiscal conditions. Such a resilient outcome was curbed only in 2011 by the harsh conditionality of the economic and financial adjustment programme of the Portuguese bailout, an instance of how deep crises provide opportunities for path-shifting reconfigurations of social policy.

KEYWORDS:

• Portugal
• fiscal welfare
• social tax expenditures
• social protection
• healthcare

Acknowledgement

We would like to thank for their generous comments and suggestions Nathalie Morel, Michaël Zemmour, Ugo Ascoli, Tiago Fernandes, Ana Guillén, Emanuel Pavolini, Paulo Trigo Pereira, Adrian Sinfield and all the participants of the Fiscal Welfare workshop, Paris, 2016. We would also like to thank two anonymous NPE reviewers.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Rui Branco is Assistant Professor at the Department of Political Studies, Nova University of Lisbon. His research interests centre on comparative state formation, civil society and social policy. His more recent work has focused on civil society and democratisation in new democracies, social policy and welfare civil society in Southern Europe, and fiscal welfare and inequality in Portugal. Most recently he co-edited with Michael Bernhard and Tiago Fernandes a special issue on ‘Civil Society, Democracy, and Inequality: Cross-Regional Comparisons (1970s–2015)’ in Comparative Politics, in which he co-authored (with Tiago Fernandes) the article ‘Social Revolution Outcomes: Civil Society in Portugal, 1974–2000s’ (April 2017).

Edna Costa is a PhD candidate in Political Science at Nova University of Lisbon. Her research interests are gender inequalities and the quality of democracy. Her Masters dissertation was on the under-representation of women in politics in Portugal (Women's Pathways to Power, 2010). Currently, her PhD project focuses on gender inequalities in work-family balance in Southern Europe. She is a researcher in the project ‘Democracy in the times of crisis’ and ‘Varieties of Democracy in Southern Europe’ and author of a chapter on ‘Female Political Representation in Southern Europe’, Varieties of Democracy in Southern Europe, ed. Tiago Fernandes (Lisboa: Imprensa de Ciências Sociais, 2017).

Notes

1 The exception is Santos and Rodrigues (2006).

2 Indeed, a OECD (2010, pp. 169–237) report shows that tax expenditures are alive, and have been growing from 2000 to 2008, both in the income and capital taxes, particularly those with social purposes, either as a share of GDP, as a share of the relevant tax revenue or simply in their numbers.

3 For example, in Thatcherite Britain, tax relief for private pensions rose 106 per cent while direct expenditure on state and supplementary pensions rose only 13 per cent. Whereas total subsidies for public sector housing were cut by 22 per cent, mortgage interest tax relief increased by 29 per cent. By the end of the eighties, relief to mortgages approached 7000 M£ per annum, while government gross capital expenditure on housing was around 3700 M£ (Judge 1987, p. 19, Mann 1992, p. 95).

4 During the 1990s, in Denmark and in the UK, the cost of tax expenditures remained unclear for lack of regular monitoring and publicity. When public spending was put under increasingly tight controls, such obscure nature made the likelihood that they would be cut down or constrained that much smaller (Kvist and Sinfield 1996, p. 38).

5 The exception is pro-poor or pro-working poor measures such as the EITC (USA), the WTC and Child Tax Credit (UK) or instances of negative income tax. See Howard (1997) and Myles and Pierson (1997).

6 This is a solid empirical finding. See data in Howard (1997, p. 28), Howard (2009, p. 91), Hacker (2002, p. 39), Mettler (2011, p. 23), Faricy (2015, pp. 186–96). For Portuguese data, see Pinto and Santos (1993, pp. 195–7, 202); Gouveia (1997, pp. 95–6); Santos and Rodrigues (2006, pp. 111–16) and CSFSNS (2007, pp. 121–3).

7 Definition: ‘reductions, exemptions, deductions or postponements of taxes, which: (a) perform the same policy function as transfer payments which, if they existed, would be classified as social expenditures; or (b) are aimed at stimulating private provision of benefits’ (OECD 2010). Can be similar to cash benefits (e.g. child tax credits) or stimulus to the provision of private benefits (e.g. tax relief for private health insurance).

8 With the goal of enhancing comparability, we use the same definitional perimeter as Adema et al. (2011, 2014). Note that this refers only to the income tax and excludes pensions. This option does not mean a lack of acknowledgment of the relevance of pension plans in the Portuguese tax expenditure regime. In fact, the value of PPR (financial applications which offer their capitalised value at retirement) has increased significantly during the nineties and the early 2000s (Santos et al., 2018, p. 484), actively promoted via income and capital tax breaks. Still, the value of tax breaks for healthcare or housing, for instance, have consistently been around three times higher than those referring to PPR. This provides a measure of the relative importance of pensions plans within the Portuguese tax expenditures regime. Between 1999 and 2011, while the first have amounted, in average, to ca. 500 M€ each per annum, tax breaks towards PPR have represented an average value of 116 M€ (Ministério das Finanças, 1999–2011).

9 Even though this paper does not explore in depth the housing tax expenditure regime, it is important to underline that since the eighties, government policy on housing has focused the promotion of private ownership through the fiscal support of mortgage housing loans. As with private healthcare, the access to this type of loans – and to the ensuing tax breaks – is tilted towards middle and upper strata.

10 See Gouveia (1997, p. 96), and Santos and Rodrigues (2006, pp. 111–16) for additional empirical evidence.

11 Decree-Law 442-A/88, November 30^th.

12 The marginal rate of the superseded imposto complementar was 80 per cent, which compares with the new 40 per cent in the new IRS. See Silva (1989, pp. 241–8).

13 Decree-law 215/89, July 1^st.

14 The regulatory framework is laid down in the Constitution (Art. 109), the Estatuto dos Benefícios Fiscais (EBF) (Art. 2, n° 3, decree-law 215/89), and the Lei de Enquadramento do Orçamento do Estado (1991, in the wording of the art. 13, n.° 1, of Law 91/2001), which mandate that the annual state budget includes a report on tax expenditures and an estimation of the revenue foregone.

15 Deductions made to gross income.

16 Previous health tax breaks existed in the imposto complementar, but this tax contributed only 6 per cent of all direct tax revenues, a minor role. See Pinto and Santos (1993, p. 193).

17 Moreover, during the revolutionary period the traditional class/religion divides among voters have been surpassed by strong confrontations concerning the democratic nature of the political regime which underpinned a vast centrist electorate, whose vote is strongly influenced by short-term factors (Gunther 2004, Jalali 2004, Teixeira 2009).

18 In Portugal, economic policies are crucial in the mobilisation of voters as, on the one hand, it is a historically poor and unequal country and, on the other, the improvement of living conditions is seen as a necessary output of the new democratic regime.

19 Diário da Assembleia da República, April 29^th, June 17^th and July 22^nd, 1988.

20 Our insight, that emerging powerful interest groups stand to benefit from targeted fiscal welfare policies deployed by parties seeking electoral gains, should qualify the framework and relative salience of clientelistic exchanges across Southern Europe (cf. Afonso et al. 2015).

21 Diário da Assembleia da República, 11–13 November, 1998.

22 A report from the Ministry of Finance advocated the increasing importance of policy models that ‘replaced the direct intervention of the state in economic and social life with marked-based solutions and private entrepeneurship’ (Minstério das Finanças 1993, p. 63). From 2000 to 2008, up to 48 per cent (2002) of public health spending went to private providers. This share has been decreasing, but in 2008 it was still 43 per cent (INE 2010, p. 20).

23 An important exception is Morel et al. (2018).