Friday 9 September 2011

US payroll taxes and Portuguese TSU

President Obama announced his plan to cut the payroll tax paid by employees from 6.2% to 3.1%, and the part of the tax paid by employers from 6.2% to 3.1%. That is a combined 6.2% reduction in payroll taxes for existing workers. For new hires, all of the 12.4% combined tax will be waived.

This in an economy that is expected to have modest GDP growth around 2 or 3%, and where the unemployment rate is 9.1%.

In Portugal , the unemployment rate is 11.1%. GDP will likely fall, with a growth rate between -0.5% and -2% in 2011-12.

But cutting payroll taxes (via taxa social unica) in Portugal by more than 3%, as part of a fiscal devaluation, was pronounced in the last couple of months as far too much. Not feasible, dangerous, irresponsible, unnecessary were some of the adjectives to describe it.

In the land of small government, it seems that when it wants to, the government can do way more than in the land of "Estado omnipresente". Not so much of a contradiction, when you think about it.


  1. But how do you say to (or convince) the external institutions nowadays 'controlling' Portugal due to excessive debt, that you want to increase it, even if it is only temporarily?

  2. Lowering the TSU as part of a fiscal devaluation is past of the official deal with the IMF. They are the ones pushing for it, so I don't think they need convincing.

  3. Yes, indeed, I was not clear in the point I was trying to make. Lowering the TSU 6.2% for existing contracts and 12.4% for new contracts would hardly be a zero sum game regarding the deficit (or the increase in tax would be tremendous).

  4. Já li o artigo seguinte (que vêm do Sedes). A frase que me deixa reticente nesse mesmo artigo é a seguinte: "Por fim, para os bens que produzimos e consumimos cá dentro, desce a TSU mas sobe o IVA, pelo que o preço final para o consumidor é exatamente o mesmo." - assume-se portanto que o produtor não irá mexer na margem de lucro. É neste ponto que coloco reticências.

  5. Caro PP,
    Imagine que o produtor tem de pagar 100 aos trabalhadores para fazer um produto. Mas, o Estado cobra-lhe mais 15 de TSU e mais 15 de IVA, levando o preço final para 130. Agora imagine que o Estado diz: desce a TSU para 10, sobe o IVA para 20. Toda a gente sabe isto, incluindo os compradores. Parece-me expectável que o preço continue nos 130. Se assim não fosse, então porque é que o preço era só 130 antes?

  6. Ricardo,

    I think it is a mistake to increase VAT rates. I believe VAT is one of the worse taxes ever invented by economists. VAT is not a consumption tax. It is a widget tax paid by both producers and consumers to a degree that depends on the elasticity of demand and of supply, and which introduces huge distortions.

    To achieve the fiscal devaluation, which I also argue is necessary, both TSU and VAT should be reduced, not increased. We should be lowering our VAT rate to a level similar to that of Spain. Other taxes (e.g., excise taxes on products with greater weight on Portugal imports, Corporate Income Taxes) should be increased to compensate for the loss in tax revenues.

  7. I have a small business and I am ready to hire one or two employees. I want to know the best way to establish and manage payroll on a tight budget.