The determinants of the local income tax: evidence from Portugal

Abstract

Little is known about the determinant factors that drive mayors’ decisions of setting the local income tax in Portugal. These may be of political, socio-demographic or financial nature. We explore a rich panel on mainland Portuguese municipalities from 2009 to 2017to shed light onto the incentive scheme of incumbent individuals and parties when setting tax policy. We find that the turnout rate to local elections, the unemployment rate and the mean wage are negatively correlated with the local income tax rate. The tax rate tends to be lower when municipal revenues increase, and higher when municipal spending increases, although we cannot rule out that part of this effect is mechanical. We also find that, in election years, tax rates tend to be higher, which may suggest the local income tax is not deemed of great importance for voting decisions. Further research may include assessing spatial correlation between municipalities, and whether the change in the default tax rate in2019 had any behavioral implications in tax policy decisions.