Understanding OE2025: the frozen rate on “sin taxes” stimulates the economy – Economics – SAPO.pt

Understanding OE2025: the frozen rate on “sin taxes” stimulates the economy – Economics – SAPO.pt

Due to the type of products that are subject to the tax, which are tobacco, alcoholic beverages and gambling, there are those who call it the special consumption tax (IEC). “sin tax”. These products are not considered basic necessities and, for reasons of public health, wish to discourage their consumption, they have always seen their taxes increase and, year by year, become more expensive for the consumer.

For example, 81% of the price of every pack of tobacco purchased in Portugal goes directly to state coffers, in IEC and VAT. More clearly: when you pay €5 for a packet of tobacco, €4.05 is taxes. Which explains why the state was able to collect around €2 billion last year from these sin taxes alone.

The corresponding rates have always been updated, but this time the government chose not to raise them, keeping these special taxes applied to the products it taxes, and still being able to support private consumption, which is expected to rise by 2%, to 2%. Generating more than €2.3 billion in revenue in 2025. But if one of the goals of this type of tax is for people to stop smoking, drinking and gambling, why don't we always increase it, and even more?

The answer he gave a partner From EY indirect tax, Amilcar NunesIt boils down to the fact that after a certain level, this increase not only ceases to have effects, but also becomes counterproductive, that is, it not only brings more revenue to the state, but also encourages the parallel economy. Here we explain why.

See also  Elon Musk unveils Tesla's Optimus humanoid prototype

“With regard to indirect taxes, and with regard to VAT, there is not much that can be mentioned, except for expanding the scope of compensation for forest firefighters, or a tentative proposal to introduce VAT collections or expanding the cash VAT system – for now, just intentions In the monitoring report of the proposed OE Law 2025.

With regard to special consumption taxes, the current proposal is finally consistent with a fiscal policy that favors the economic theory that marginal increases in the tax rate, beyond a certain optimal point, will not translate into increases in tax revenue. In practice, successive increases in the current rates of special consumption taxes will ultimately lead not to an increase in the state's tax revenues, but rather to a potential stagnation if not even a decline in the implementation of the final budget that the state has planned to collect from these same taxes.

This can be easily explained by the behavior of economic agents and even consumers. In the first case, there may be an incentive to relocate and/or restructure supply chains, as a means of responding to price increases (especially if they are annual and not always justified only by possible adjustments in relation to inflation rates). Possible internal containment at the margin of the burden of increased tax rates could also cause disruptions at the level of production and distribution and, in the medium and long term, a reduced ability to invest in innovation, internationalization or even maintain turnover in the face of such rate increases.

If fixed costs are the same or increase annually, and tax rates are too, in effect, economic operators either withdraw these costs and taxes themselves or absorb them into potential margins. Especially since consumption, especially of products that are not considered basic necessities, indicates greater sensitivity to price. Hence, taxes that are not in line with a comprehensive perspective and economic growth can generate potential phenomena of counterfeiting and smuggling, which will then generate less revenue for the state (despite increases in tax rates). In addition to the danger of product quality and safety in these parallel markets.

See also  Fintech Klarna installs development center in Portugal and will create 500 jobs

On the other hand, if, in the second case, consumers reduce their consumption of certain products, replace them with others or buy them at points of sale (even foreign ones, for example in neighboring Spain), national tax revenues decrease, although the rate increases.

Therefore, we understand that the current OE2025 proposal, by proposing a general freeze (i.e. no increase in interest rates), will have a beneficial and refreshing effect on the national economy, bringing some relief to economic operators in terms of modernization, financing and debt. and payments due in 2025.”

By Andrea Hargraves

"Wannabe internet buff. Future teen idol. Hardcore zombie guru. Gamer. Avid creator. Entrepreneur. Bacon ninja."