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IRS Update in 2023 Only Offsets Part of Inflation Impact – Executive Summary

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The IRS's updated brackets in 2023 fell short of post-inflation payroll recovery expectations, a situation that tends to repeat itself this year. Simulations conducted by the Bank of Portugal (BdP) show that the revision of income bands and some changes in tax cuts eliminated only a third of the inflationary benefits that increased state revenues.

Last year, increases in IRS and social contributions generated a record revenue stream, resulting in a surplus of 1.2% of GDP, driven by job creation and an average 8.4% increase in wages, Business notes. .

IRS levels were revised by just 5.1%, in line with average salary increase expectations agreed between the government, employers' unions and the General Workers' Union. The DPP highlighted in its Economic Bulletin that, because of the IRS's advances, the increase in income places taxpayers at higher marginal rates, causing revenues to grow faster than taxable income.

Thus, without the amendments to tax standards, the exceptional revenues would have amounted to 1,013 million euros, but with the updated brackets and some deductions, the additional revenues amounted to 713 million euros, the same source reveals.

For 2024, BdP simulations suggest a similar scenario, with levels updated by just 3%, in line with expected inflation. Without the changes, revenues would be 765 million euros, but due to the updates, revenue gains are estimated at 498 million euros.

Failure to fully adjust tables and deductions for the impact of inflation continues to limit the positive impact of salary increases. The fiscal measures adopted to reduce the tax burden, such as reducing the second tranche rate and reforming the minimum presence rules, had a positive impact of €700 million.

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