Imposto Mortágua – a hated property tax in Portugal, but why?

Imposto Mortágua (Portuguese for Mortágua Tax)  is a type of property tax that was implemented in Portugal in 2017. Its formal denomination is AIMI, Adicional ao Imposto Municipal sobre Imóveis (Portuguese for Additional Property Tax). It gained popularity as Imposto Mortágua, due to the Portuguese congresswoman and economist who created this tax, named Mariana Mortágua. As such, what is this tax about?

In short, this is an additional tax to the common Portuguese property tax IMI (Imposto Municipal sobre Imóveis) in Portugal. It is only imposed on individuals and corporations with luxury properties – which can vary from urban housing buildings to construction fields. However, regarding corporations, this tax only considers property that is not being used for production, while households’ property used directly for housing is not accounted nor taxed too. Furthermore, all revenue collected from this tax is directly allocated to the Portuguese Social Security.

More specifically, AIMI is only imposed on citizens that own property whose tax equity value is above a certain threshold, this being 600,000 € in 2019 for non-married individuals and 1,200,000 € for married individuals benefiting from joint taxation. Moreover, this tax is progressive and, therefore, divided in three brackets, with tax rates ranging from 0,7% to 1,5%, coming from the less valuable properties to the more expensive ones, respectively. This information regards the year of 2019, and a more visual and detailed representation of this tax methodology can be seen in the figures below.

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Figure 1 – Tax brackets and absolute amounts imposed on singular, non-married individuals, owning properties valued at that respective amount. The values on the left column show the possible Valor Patrimonial Tributário (Portuguese for Tax Equity Value) of a property (as one can see, properties valued at bellow than 600 000 € are not taxed), the values on the middle column show the marginal tax rate for each property value and the values on the right column show the absolute amount an individual has to pay, marginally.

Source: Banco Montepio


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Figure 2 – Tax brackets and absolute amounts imposed on properties owned by married individuals with joint taxation.

The interpretation for this is equivalent to the one in Figure 1, except that the tax only applies to properties valued at more than 1 200 000 € owned by married individuals with joint taxation.

Source: Banco Montepio


It is also important to state that these tax rates, since they are marginal, are therefore imposed on the difference between the next threshold value and the extra income above the previous threshold/bracket. For example, on a singular household with a property valued at 1,100,000 €, the following taxation will be imposed: for the first 600,000 €0.7% will be deducted from 400 000 (i.e. 1,000,000 € – 600,000 €), and then on the extra 500 000 €, a marginal tax rate of 1% will be imposed on the 100 000 € (i.e. 1,200,000 – 1,100,000 €),. As such, the absolute amount paid by this household on a 1,100,000 € property will be:

(400,000 € * 0.7%) + (100,000 € * 1%) = 2,800 € + 1,000 € = 3,800 €.

This tax created an interesting phenomenon – it is highly disliked by the Portuguese population, despite the fact that the vast majority of the people not supporting it are not affected at all by the tax itself (indeed, less than 1% of all Portuguese taxpayers are obligated to pay AIMI).

As such, one might ask: but why? Is it a problem of just misinformation of the population about the tax methodology or are there more complex political economy behaviours underlying such phenomenon?

Evidence shows that taxes on wealth (such as AIMI) are known to combat inequality in a very effective way. Indeed, wealth inequality shows a much larger gap compared to income inequality. Therefore, if an economist/politician has as main priority the reduction of inequality, a wealth tax might be the way to go since it tackles the main problem of wealth inequality directly.

AIMI is a great example of this, since taxing property is one of the most effective ways to tax wealth – not only it taxes directly the rich, who might have large inheritances and wealth stocks that are generating no flow to the economy, nor contributing to economic growth in any way, but it is also very difficult (if even impossible) to deviate from this tax, since property cannot be moved. This means that the likelihood that this tax generates a reflexive outcome is very narrow.

As such, it is also important to clarify that wealth taxes are levied on the wealth stock (therefore, the total amount of net wealth a taxpayer owns), while an income tax is imposed on the flow from the wealth stock. The income earned from returns to wealth becomes part of the wealth tax base for the next year, as the wealth stock grows.

This might very well be the reason why people dislike Imposto Mortáguathey feel as though they are being double-taxed. Indeed, wealth is a stock generated by the accumulation of income flows throughout one’s life (and also possible inheritances generated from income flows of past generations) and such income flows have been, for the most part, heavily taxed by income taxes. Accordingly, many people disagree with the policy of taxing wealth, since they view it as though such wealth has been taxed already through the taxation of income flows that ultimately generated such wealth. Considering AIMI specifically, this reasoning may widely apply too. People might view their properties as an accumulation of the income they generated throughout life, that was taxed accordingly and, therefore, they believe that owning such properties should not be upon the obligation of paying an added tax.

Thus, coming back to the initial question of why AIMI was so disliked when created, one might believe the answer to be a combination of the following reasons – not only because of a general dislike for wealth taxes, as many people view it as being unfair, but also due to misinformation about the respective tax methodology, thus believing AIMI would apply to any individual owning any kind of property or land (which is not the case).


As such, one might question what are the motivations to apply such tax as Imposto Mortágua in Portugal. The answer relates to the trade-off the government makes between efficiency and equity considerations, being this a purely normative discussion and, therefore, harder to reach fair conclusions.

For every public policy the government makes, a trade-off must be done between the effect on market efficiency and the effect on income and wealth inequality that such policy would make. How to compute the optimal trade-off is a hard task to ask and one can even say it depends more on politics rather than economic reasoning. The creation of AIMI is, therefore, a policy that prioritizes the latter – its ultimate goal is to reduce wealth inequality in Portugal – but, as one can see, it comes with some consequential hurdles. Nevertheless, in 2019, this tax generated revenues of 151,560,000 €, which were around 8,52% of the state’s tax revenue. This might benefit the activity of Social Security, which could ultimately help lower classes by giving them the needed resources and, therefore, reduce inequality.

Concluding, morally speaking, it is very ambiguous to objectively state whether this public policy is good or bad for the country, since it mainly depends on one’s motivations. When creating Imposto Mortágua, the government considered the economic impacts and may have disregarded eventual discontents among the population. Nevertheless, the government believes its economic outcomes show a clear positive social impact for many citizens. But, as seen above, people’s expectations, motivations, and consequent behaviours are highly heterogeneous.


Sources: Banco Montepio, Economia ao Minuto, Esquerda.net, Idealista, Portal das Finanças, Tax Foundation, ZAP Notícias

Is TAP worth taxpayers’ money?

The nationalization of TAP Air Portugal (hereby simply referred to as TAP) has been a hotly discussed topic recently. In this article, the major pros and cons of such a move by the Portuguese government are put into perspective, during a time in which taxpayers cannot afford to cover a bad decision from those in charge.

Founded back in 1945, under the Estado Novo dictatorship, TAP was initially a private company. During the first three decades of existence, its development occurred at a slow pace, mainly due to the fact that Portugal was a poorly internationalized country by the time. With the deposition of the regime, which led to the nationalization of the company (along with many other businesses), and a further global integration of the country, TAP could grow, expanding its routes and reaching more points on the globe. The fact that TAP took almost 20 years to reach the one million passengers milestone, compared to the 17 million attained in 2019, is a proof of the tremendous development registered not only by the company, but also by the sector as a whole.

What’s the company’s current situation?

Despite the pronounced long-term growth of the aviation industry, TAP exhibits long-lasting liquidity/solvency problems, presenting, year after year, worrying financial statements. As a matter of fact, the incapability of the firm to deliver sustainable results throughout decades led to its reprivatization (2015) in the aftermath of the financial crisis that hit Portugal.

Before diving into the numbers, let us proceed with a brief characterization of the firm’s organization nowadays. In fact, the aviation company itself, TAP SA, belongs to a holding, TAP SGPS, founded in 2003. Besides TAP SA, the group owns eight additional subsidiaries working on related businesses, such as catering, maintenance, cleaning services and computer engineering.

In 2015, under Pedro Passos Coelho’s government, the group was privatized and the Atlantic Gateway consortium, headed by David Neeleman and Humberto Pedrosa, acquired a participation of 61%. Later, in 2016, António Costa’s office partially reverted the process and secured a 50% share to the state, assuring an even split across private and public ownership. This ended up translated into an ambiguous shareholder structure, which has remained unchanged since then. But for how long?

TAP SGPS is in severe financial distress. The graph below says it all. In 2008, owners’ equity became negative and net income simply disappeared, almost never to be seen again. To make things even worse, the level of indebtedness is currently at dangerous levels (above 200%) and, even though the expansion of the aircraft fleet has been contributing to increased assets, liabilities struggle to be reduced. In finance, such analysis should ideally be conducted via peer comparison, but the values presented (namely, those relative to income) are intrinsically poor and are a good portrait of the group’s frightening financial situation.


Data Source: Sabi Nova SBE

Data Source: Sabi Nova SBE

Should TAP become a state-owned company again?…

In this dramatic scenario, one may wonder what factors could be a justification for state ownership, as the financial situation does not seem to be one. Consequently, on the one hand, nationalization’s supporters argue that private management would only care about profit and this would potentially mean the elimination of important routes for the Portuguese community, such as the links with Guiné-Bissau or Cabo Verde. On the contrary, the state would defend the best interests of citizens, even if they led to inefficient outcomes. In this domain, the fact that most European countries have state-owned airlines is often used as an authority argument to back nationalization.

Another idea in favor of state control is the role of ambassador of the Portuguese culture that TAP is believed to play abroad. The defendants of this thesis argue that, by becoming private, the brand would lose connection to its Portuguese background and start to be seen as just another airline, which would harm Portugal’s international exposure. In fact, this is one of the main concerns of António Costa’s government, which considers TAP as a «strategic company». Taking into account that the aviation industry is among the most affected by the COVID-19 pandemic, he says that the government will avoid its bankruptcy at all costs. Also, TAP employs more than 10,000 people nowadays and many believe that privatization, a merger or an acquisition by a competitor would mean many jobs lost.


Could thousands of employees fill unemployment claims in case of privatization? 

Could thousands of employees fill unemployment claims in case of privatization? 

… Or should it be effectively privatized?

On the privatization side, people argue that the state has no right to arbitrarily inject taxpayers’ money into a company near bankruptcy and which can well be run by a private entity with no prejudice for national interests. If for a bank that is admissible due to systemic risk, an airline company is not believed to be worth of taxpayers’ effort, especially considering that there are loads of similar companies providing the same kind of services, many times at a lower cost for the client.

An interesting counterargument to that of national interests is precisely that, as opposed to the theorized, TAP does not defend the interests of Portuguese citizens, but rather those of Lisbon. The company is accused of regionalism, namely owing to the fact that it announced the re-establishment of more than 70 routes from Lisbon and just 3 from Oporto after the lifting of containment measures. So, if the company only serves one city, it is argued not to be fair that all taxpayers are equally liable for it.

To rebut the vision of job posts loss, the apologists of privatization argue that, if TAP goes bankrupt, other companies will come over and fill its place. This would mean that, despite scale advantages, most workers will not lose their jobs, but will rather be hired by other companies. In the context of Lisbon’s airport, given TAP’s large share, this could mean lower fees in case of bankruptcy, as competition would increase. The case of the United States of America seems to support this theory. After World War II, the country deregulated airlines market and, despite Pan American (their public company by the time) went bankrupt, the increase in competition led to lower fees and routes’ expansion.

What does the future hold?

At this moment, there is no certainty about the future of TAP and, even though state’s help (through convertible bonds, for instance) is a possibility, nationalization is unlikely to happen, as the burden it would imply on households during these times would be massive. Extraordinary times demand extraordinary policy action, but taxpayers could well not be able to deal with a questionable public rescue to TAP.


Sources: ECO, Jornal de Negócios, NiT, Notícias ao Minuto, Sabi Nova SBE, Showbiz Cheat Sheet, TAP, Wikipédia

State of emergency: What now?

On the 18th of March of this year, Portugal’s President Marcelo Rebelo de Sousa declared the state of emergency, immediately, to the extent of all Portuguese territory, following other European countries that also opted to declare it, such as Spain, France, Italy and Germany (to name a few from the total of 25 countries that already announced it worldwide).

Since November 1975, after a revolutionary attempt from communist forces to implement a far-left dictatorship, the State of Emergency hasn’t been declared in Portugal. 45 years elapsed and due to the COVID-19 pandemic, Portugal was forced to announce the State of Emergency, in order to restrict the spread of the virus.


What measures can Portugal take to face national catastrophes?

There are 4 mechanisms, consecrated in the Portuguese Law, in order to deal with national catastrophes. From the least to the most severe, we have the state of alert, last used in the summer of 2019 during the protests of truck drivers of hazardous content, which only means that national civil protection and national security forces are ready to attain any request from the government. The state of public calamity, announced two weeks ago by the municipality of Ovar, implies a reduction of economic activity, limitations to the number of inhabitants in public places and the establishment of a safety perimeter. Lastly, the two most severe mechanisms, the state of emergency and the state of siege.

After all, what does the state of emergency imply? What’s the constitutional interpretation? What are the boundaries that define it and that distinguishes it from the state of siege?

What is the state of emergency?

The state of emergency allows the government to suspend certain rights, freedoms and guarantees in order to deal with an exceptional situation. In Portugal, the state of emergency is declared by the President, initially requiring permission from Parliament and then approval from the Council of Ministers. According to the Constitution, it cannot last more than 15 days (although it can be renovated) and it cannot suspend certain rights, such as the right to life or the right to defend oneself in court.

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In this particular emergency – an epidemic – there are two particular rights whose suspension could be useful: The right to free movement and the right to private initiative. Suspending the right to free movement allows the government to impose quarantine and curfews, to forbid people from leaving their houses for non-essential trips (or to forbid elderly people from leaving their houses for any reason), and to limit entry and exit in Portugal, by cancelling flights to and from critical countries and controlling the border. Suspending the right to private initiative allows the government, among other things, to forbid non-essential commercial establishments from opening, to force essential ones (such as pharmacies, supermarkets or medical supplies factories) to stay open, and to take control of private companies (for example, to temporarily integrate private hospitals in the public healthcare system). The state of emergency declared in Portugal also suspends the freedom of assembly, allowing the government to forbid large public gatherings such as protests, concerts or religious ceremonies.

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Criticism

Some have opposed the declaration of the state of emergency, fearing that the President is opening a dangerous precedent for the suspension of rights and freedoms. These worries are not unwarranted: historically, there are many incidents in several different countries of the state of emergency being abused. For example, in Germany between the two world wars, the state of emergency was declared quite often, usually by governments who didn’t have a majority in Parliament and used the state of emergency to legislate without democratic control. This culminated when, after a fire destroyed the German Parliament, Adolf Hitler blamed the fire on communist rebels and used it as an excuse to declare the state of emergency, imposing the dictatorial regime that lasted until the end of WWII. This is only one of many historical examples of the state of emergency being the start of a dictatorship. While it is difficult to argue that Portugal is currently facing any risk of that nature, these historical examples are the reason why many people are very cautious about supporting the declaration of the state of emergency.

State of siege

On the opposite end of the spectrum, some have claimed that, in Portugal’s current situation, a state of emergency is not enough, and a state of siege should be declared. The state of siege is one degree of severity above the state of emergency. According to Portuguese Law, the state of emergency can be declared due to any public calamity or threat of public calamity, while the state of siege can only be declared in the event of acts of force (such as military invasions) or rebellions. In a state of emergency, rights and freedoms can only be partially suspended, while in a state of siege they can be completely suspended – for example, the current state of emergency suspends the right to strike only for workers in healthcare and vital sectors of the economy; in a state of siege, all strikes could be forbidden. In a state of emergency, the powers of civil authorities can be reinforced, and the armed forces can be tasked with supporting those authorities; in a state of siege, all police forces are put under the authority of the Chief of the General Staff of the Armed Forces, and all civil administrations must provide the armed forces any information they request.

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Portugal is facing one of the moments of greatest uncertainty in its modern history.

Fighting an unknown enemy poses difficult challenges and raises important questions. Only in the end will the country be capable of scrutinising the choices made and to discuss a future approach towards a similar crisis. Until then, we shall stand as one.


Sources: Observador,Jornal Sol, ECO

Portuguese Law (in Portuguese):

Constituição da República Portuguesa (Portuguese Constitution), namely articles 19 and 138 

Regime do Estado de Sítio e do Estado de Emergência – Lei n.º 44/86, de 30 de setembro 

Decreto do Presidente da República n.º 14-A/2020 



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Where will Portugal’s next airport land?

Humberto Delgado Airport is an international airport serving the Portuguese capital of Lisbon. However, it has reached its maximum capacity, and the country must now consider the construction of a new airfield.

This is not a new discussion. Humberto Delgado Airport (Lisbon’s Airport) was first opened in 1942. In 1969, when Portugal wasn’t yet a democracy, the discussion surrounding the possibility of a new airport in Lisbon was first officially launched, when the Prime Minister at the time, Marcello Caetano, established a committee to develop an expansion project. However, reaching a solution was a lengthy procedure.

In 2008, the Sócrates government presented a project for an airport in Alcochete. This airport would cost approximately 4.9 billion euros and would entirely replace the existing Humberto Delgado Airport, in response to complaints of how this airport was too close to the city and causing excessive noise pollution. However, the project was suspended in 2010 due to the financial crisis.

The next government then started looking for a cheaper alternative: a smaller airport that would complement, not replace, the existing one. Thus, in 2011, the Montijo idea was born.

In January 2017, the current Socialist government introduced a project for the airport in Montijo. The new airfield would increase the number of aircraft movements per hour from 48, solely supported by the Lisbon airport, to 72 movements, taking both airports into account. It will also be able to draw 8 million passengers each year, providing the Portuguese capital with the capacity to annually receive roughly 40 million air travellers.

Image 1: The Montijo Airport Project

Image 1: The Montijo Airport Project

A study of environmental impact presented by ANA – the Portuguese authority responsible for managing the country’s airports – concluded that the establishment of an airport in Montijo would not have a large environmental impact, although it would induce some territorial changes in the future urban expansion of the area the planes will fly over. APA – the Portuguese Environmental Agency, involved in the elaboration of the study – concluded that a new airport does not constitute a serious threat to birdlife in the surrounding area and acknowledges that future actions may be undertaken in order to minimize those impacts. Also, the study states that birdstrikes (collisions between birds and aeroplanes) are not likely to happen.

For the 94,000 citizens living near the future airport, the study points out that the noise can induce severe exasperation to 12% of the citizens, 17% of them can suffer from moderate exasperation and it can cause sleeping disorders to 3% of the community.

The conclusions of the report didn’t seem to please all specialists. 11 of them presented a study which reveals that in 50 years-time, a significant portion of the landing track will be flooded due to rising sea levels. This study further states that greenhouse gas emissions have been underestimated by the former report. The environmental association ZERO also poses serious doubts in regard to the real impact that the new airport will have in the area’s wildlife, therefore demanding a new environmental evaluation using different techniques in order to better grasp the consequences that the project will have on those natural habitats.

Image 2: How rising sea levels are expected to affect the new airport

Image 2: How rising sea levels are expected to affect the new airport

In 2019, the government tried to sign a contract to start construction in Montijo in 2020, but it ran into some legal problems. A government decree from 2007 regarding the construction of airports in Portugal established, among other things, that no airport could be built without the consent of all municipalities affected by it – the ones where the airport was located, the ones the airspace of which would be affected and any others that would suffer environmental impacts.

This raised a problem when several city councils in the south bank refused to give permission to the construction of the airport, citing environmental reasons. The mayors of Moita and Seixal have since headed the campaign against the new airport in Montijo and in favour of the Alcochete solution. The mayors, both members of the Portuguese Communist Party (PCP), have been accused of rejecting the project for partisan reasons – the Communist Party has long defended the Alcochete alternative, instead of Montijo.


The Minister of Infrastructure, Pedro Nuno Santos, has already stated that the decree could be altered by the government to remove this impediment, but that change could be brought to a vote in Parliament if any party requests it – and the Communist Party is likely to.

Then, the government would have to find a majority in Parliament that would change the decree. The Communist Party, as mentioned above, is opposed to the Montijo solution, and so is the Left Bloc, which also favours Alcochete. The government would then need the support (or at least the abstention) of PSD, the main opposition party. But Rui Rio, leader of PSD, has already stated that his party will not change the law for a specific situation and that the government should follow the law, negotiating with the city councils that raised objections to the airport in Montijo.

Amidst this deadlock, many people have looked for alternatives to the airport in Montijo. Former Prime Minister José Sócrates, in an opinion article in Expresso, argued again for the Alcochete solution developed by his government. He points out that, according to European Union noise and nature conservation regulations, an international airport should not be built too close to a city or next to a protected environmental area. Sócrates further points out that, unlike Montijo, the Alcochete project is already prepared, the environmental impact has been studied, and permission from all city councils affected has been obtained.

In response to the main argument favouring Montijo over Alcochete – the idea that Alcochete is more expensive – Sócrates states that the initial phase of the Alcochete project (which would allow it to complement, not replace, the existing airport) is not significantly more expensive than Montijo. However, he bases these statements about costs on articles written by engineer Matias Ramos, which have never been refuted or confirmed by other sources.


Image 3: The Beja Airport

Image 3: The Beja Airport

Another airport alternative defended by some, would be to capacitate Beja Airport to serve Lisbon. Beja Airport has no regularly scheduled flights and is mostly used by the Maltese airline Hi Fi to store airplanes, so it is free to receive more flights to Lisbon. It is already fully built, and there are plans to connect it to Lisbon by highway, a car trip that would take around two hours.

Modernising the existing train line between Beja and Lisbon to allow the fastest trains operating in Portugal, the Alfa Pendular, to use it would require a significant investment, but it still wouldn’t be able to make the trip between Lisbon and Beja Airport in less than 85 minutes. This can be compared to the 50-minute train trip from the centre of London to Stansted Airport, for example.

Besides, critics point out that Beja Airport was built with the intention of attracting low cost airlines serving Lisbon and the Algarve, but it never succeeded, and it never had any regularly scheduled services.

Another proposed alternative would be to build an airport in Alverca, in a military aerodrome. This aerodrome served as Portugal’s first airport in the 1930’s, before Humberto Delgado Airport was built. However, adapting it to receive modern airplanes has never been studied, in terms of costs or environmental impact.

So, there seem to be several alternatives to solve the saturation of Lisbon Airport. Their costs, their environmental impact and political circumstances will determine where the new airport in Lisbon will be built, changing the face of the city and the region for decades to come.


Sources:

  • Público, Observador, RTP, Jornal de Negócios, Expresso, Diário de Notícias


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