TAXES, FINANCING AND SKILLS IN PORTUGAL Portugal Skills Strategy Diagnostic Workshop Lisbon, 3-4 July 2014 Pierce O Reilly OECD Centre for Tax Policy and Administration
Education, Finance and Skills in Portugal How do taxes and financing affect incentives to develop skills in Portugal? How do taxes affect incentives to use and activate skills in Portugal? 2
Overall Spending on Education USD, adjusted fo or GDP 14000 12000 10000 8000 Financing Education in Portugal: Total spending on education, primary to tertiary Evidence that education spending is low in Portugal compared to European competitors 6000 4000 2000 0 Source: Education at a Glance 2013 3
Financing Education in Portugal: Spending on tertiary education per student This is especially true for tertiary education. Overall Spending on Education USD, adjusted d for GDP 14000 12000 10000 8000 6000 4000 2000 0 Source: Education at a Glance 2013 4
Costs of Education in Portugal Costs of education can be high Lost earnings during school Tuition costs, books, materials Costs of funding education (student debt) Costs can be reduced by Scholarships & Grants, Student loans Education Tax Breaks for students and employers Do financial constraints have a big impact on skill development in Portugal? 5
Benefits of Education Benefits come in the form of Extra wages Better employment prospects But often these extra earnings are taxed away. Portugal has a progressive tax system 7 tax brackets. 6
Special tax and skills policies in Portugal Income Tax: Tax credit of up to 30% of educational expenses Scholarship and grant income exempt from taxation. Corporate tax: Full deductibility of education and training costs VAT: Exemption of education and training services. Are these provisions used? 7
What is the overall impact of the Tax Code on Skill Development? The overall Effective Tax Rate on Skills measures How much does the tax code incentivize or dis-incentivize skill development? Who faces the highest disincentives for skill development? 8
The Effective Tax Rates at Different Income Levels Which income levels have the highest tax and financing burden on skill investments? Effective Tax Ra ate on Skills 0,3 0,25 0,2 0,15 0,1 0,05 0-0,05-0,1 0,3 0,6 0,9 1,2 1,5 1,8 2,1 2,4 Income, % of Average Wage 9
Skill Development and Skill Activation More years in the labour force - more time to earn back the cost of upskilling Labour Market Participation Skills Levels Higher skills - more incentives to keep working 10
Tax Rates in Portugal How high is the tax burden on activation in Portugal? Income tax and Socia al Contributions, % of Labour Co osts, 2012 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 Single no ch 67 (% AW) Single no ch 100 (% AW) Single no ch 167 (% AW) Single 2 ch 67 (% AW) Married 2 ch 100-0 (% AW) Portugal OECD Average Source: OECD Taxing Wages 2012 11
Skills, Activation and Taxation Labour Tax Wedge Employment Skill Levels Where taxes on labour are too high, it can be too expensive to hire, and not rewarding enough to work. 12
Skills, Activation and Taxation Labour Tax Wedge Employment Skill Levels Where skill levels are low, it is harder for workers to find work at a given wage level. 13
Youth Skills and Youth Unemployment 305 PIAAC Lite eracy Scores, 16-24 Year Olds 300 295 290 285 280 275 270 265 260 Japan Netherlands Finland S. Korea Estonia Australia Sweden Czech Rep. Poland Germany Austria Denmark NorwayCanada France United States Slovak Rep. Ireland Italy Spain 255 0 10 20 30 40 50 60 Youth Unemployment Countries with low skills tend to have higher unemployment, especially among young people. Source: PIAAC, OECD Employment Database 14
Skills, Activation and Taxation Labour Tax Wedge Employment Skill Levels Where skill levels are low, a high labour tax wedge may make even more challenging to sustain high employment levels. Is this a problem in Portugal? 15
Thank You! pierce.oreilly@oecd.org 16
OECD Thematic Session: Financing and taxing skills Please take some time to reflect on how these questions resonate with your individual experience and daily work. a) Based on your experience, how do credit constraints and other financial barriers influence students decisions to invest in education at the tertiary level? What about in vocational education? And in adult education? Please give concrete examples. b) Based on your experience, how do labour taxes impact on employers decisions to hire workers in Portugal? What other financial or tax aspects of Portugal s skills system do you think are working? What aspects need to be improved? As a group, please: Discuss Provide concrete examples that illustrate your points On each poster, please write down: The results of your group discussion 17