I feel like a broken record when I write about European fiscal policy. In almost all cases, I cite OECD data showing that countries are in fiscal trouble because of excessive spending rather than inadequate tax revenue. I then show that the politicians are using the spending-caused crisis as an excuse to raise taxes even further. The higher taxes, needless to say, undermine growth, which then creates more pressure for higher redistribution and welfare spending. And so the downward spiral continues. The latest example is Portugal, which is in trouble because the burden of government spending has jumped from 43 percent of GDP to 51 percent of GDP in the past 10 years. The tax burden also has increased, from 40 percent of GDP to 43 percent of GDP, so there’s zero legitimacy for those who want to argue that there’s a revenue shortfall. But Portugal’s greedy political class respond with higher taxes – including an increase in the value-added tax (a familiar refrain all throughout Europe) and higher personal and corporate income tax rates. The Financial Times reports on Portugal’s fiscal self-destruction:
José Sócrates, Portugal’s prime minister, on Thursday announced tough new austerity measures, including a “crisis tax” on wages and big companies, designed to more than halve the country’s gaping budget deficit in less than two years. …Describing the measures as essential to defend Portugal’s credibility in international financial markets, Mr Sócrates announced a one percentage point increase in value-added tax to 21 per cent and increases of up to 1.5 per cent in income tax. The increases, which are being called a “crisis tax”, include a 2.5 percentage point rise in corporate tax to 27.5 per cent on annual profits above €2m.
http://www.ft.com/cms/s/0/0e4e9232-5e6d-11df-9266-00144feab49a.html
