Thousands of people are coming together to demonstrate for the right to fair and affordable housing … [+] and the end of real estate speculation in Porto, Portugal, on January 27, 2024. The protest is beginning in Praca da Batalha and ending in front of the City Hall of Porto, also contesting the policies taken by the municipality of Porto in relation to housing. The Door to Door and Homes to Live protests are taking place in several cities from North to South of the country. (Photo by Rita Franca/NurPhoto via Getty Images)
NurPhoto via Getty Images
Portugal is facing a challenge that threatens its future prosperity: a severe brain drain, especially among young workers. Over the past decade, thousands of young and educated Portuguese people have left the country in search of opportunities elsewhere in Europe. The contributing factors include high youth unemployment, low wages, and a housing market that feels increasingly out of reach for young homebuyers.
In an attempt to reverse this trend, the Portuguese government has introduced a novel plan—offering young workers a decade of tax breaks, including a one-year 100% income tax exemption. The hope is preferred tax treatment will help keep Portuguese talent in Portugal, and position the country as a more attractive place for young professionals. The success of these measures remains an open question, however, as the country continues to grapple with complex political and economic challenges.
Portugal’s Tax Incentive Scheme
At the heart of the strategy lies a ten-year progressive tax incentive regime for individuals under 35 years of age. The plan offers a first year 100% income tax exemption for individuals earning up to €28,000. For the second year through the fourth, the exemption is reduced to 75%. There is a 50% exemption for years five through seven and finally a 25% exemption for years eight through ten.
By reducing the tax burden on young workers, the government aims to tackle what they believe are two main drivers of youth brain drain: high taxes and low wages. Estimates place the total number of residents to benefit from the plan at between 350,000 and 400,000. The Portuguese youth unemployment rate has fell slightly in recent years, but nonetheless remains high as compared to other states in Europe.
Political Opposition
The tax incentive scheme is being rolled out amidst a backdrop of political negotiation and substantial uncertainty. The center-right government of Prime Minister Luis Montenegro, which holds a minority in parliament, has historically had to cooperate with opposition parties to get tax bills passed.
Most notably the Montenegro government has needed to cooperate with the Socialists in parliament. Initially the Montenegro government proposed a flat 15% tax rate for young workers—and the current progressive model is seen as a compromise between the two parties.
A third, far-right party, approves of the tax cuts but is positioned as an avowed political opponent of the Montenegro government. The political realities of deal-making leave the ultimate viability of the proposed plan an open question.
A Complex Problem
Even if the plan ultimately does pass, it appears a constellation of causes contribute to the Portuguese brain drain. Despite recent improvements in the unemployment rate overall, nearly a quarter of young peopleremain jobless. This stands in contrast to other countries in Europe, where emigrating Portuguese workers have, to this point, found better job prospects.
Wage stagnation has been an ongoing issue. As the cost of living continues to rise, especially in urban areas like Lisbon and Porto, driven in part by “digital nomads” and foreign investment, the effect is one of increasing precarity. Government policies, such as “golden visa” or “cashport” programs that grant residency in exchange for property purchase or investment, put a further strain on the housing market.
The lack of affordable housing has given rise to recent protests across the country, with young people voicing frustration at a system that seems to preference foreign investors over its own citizens. The overall result has been a mass exodus of young people—between 2008 and 2023, more than 360,000 of them left in search of better opportunities abroad.
The new tax breaks aim to tackle some core economic reasons behind the youth emigration—low wages and high taxes—but it remains to be seen if a simple and time-limited solution can reverse the root causes of the brain drain.
A Quick Fix vs. a Long-Term Solution
The structure of Portugal’s tax scheme—keyed to age, income, and limited to a ten-year period—suggests the government views reversing the brain drain as a relatively short-term project.
By focusing on young people in the early stages of their careers and offering immediate financial relief, the government is attempted to stem the exodus of talent and encourage those who have already left to return. This approach may provide short-term gains, but it raises questions about whether it can address the deeper, structural issues behind youth emigration.
The tax breaks alone won’t solve the problem if young people don’t have sufficient opportunities for domestic employment. The government will need to simultaneously focus on creating an economic environment that encourages business growth and innovation, particularly in those industries that can provide high-quality, high-paying jobs.
But fostering that growth is fraught with difficulty—without careful management, efforts to attract investment quickly devolve into multinational corporation pocket-lining endeavors. Overly generous or mistargeted incentives or regulations might lead to a scenario where foreign companies extract profits without adequate reinvestment into local communities or raising the standard of living for the average Portuguese citizen, long-term.
In the next steps that must follow, care must be taken to strike the right balance between attracting necessary investment and ensuring that Portugal’s residents are the ones that benefit from economic growth. The challenge for the government will be to attract and retain talent while fostering an economic environment that both nurtures that local talent and provides opportunities for long-term employment—without simply cutting checks to multinational corporations and artificially juicing the labor market for the next decade with no permanent plan in place.
Source link : https://www.forbes.com/sites/andrewleahey/2024/10/11/portugal-attempts-to-offset-brain-drain-with-youth-tax-breaks/
Author :
Publish date : 2024-10-11 16:29:22
Copyright for syndicated content belongs to the linked Source.