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The Determinants of Personal Income Tax in Portugal

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The Determinants of Personal Income Tax in Portugal

Abstract

Personal income tax is the primary source of revenue for the Portuguese government.

This study examines the determinants of personal income tax in Portugal. To achieve the

study’s objectives, the research will use per capita personal income, population density,

literacy levels, and inflation rates as the dependent variables, but personal income tax will

remain as the main variable. The researcher expects to establish a direct relationship between

the independent variable and dependent variables. Additionally, the investigator will use both

multiple and simple regression analysis techniques to evaluate the data. Moreover, the study

will adopt questionnaires as a tool for data collection. The study is also expected to illustrate

that the mentioned factors affect personal income tax in Portugal.

INTRODUCTION

Background of the Study 

Personal Income Tax (PIT) is one of the most significant sources of revenue that the

Portuguese government gets funds to finance its functions and objectives. Moreover, it is

used as a tool for income distribution and directly affects the purchasing power of the

citizens. Taxation appears as a government act of imposing levies on the income, profit, or

wealth of individuals and corporate organizations. It serves as a method of collecting

resources needed for the operationalization of government policies and development agendas

and stabilize the economy. Although PIT is the major source of revenue for the Portuguese

government, it can reduce an individual’s morale to work, save, and earn income. Therefore,

the executive should find an ideal taxation system that will encourage its citizens to work.

Study Variables and Objectives

Personal income tax is the dependent variable. The research expects to establish the

relationship between per capita personal income tax and per capita Gross Domestic Product
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(GDP) because GDP is an indicator of economic development in Portugal. Additionally,

demographic factors, such as population density and percentage of the urban population, are

essential determinants of personal income tax. Moreover, literacy levels indicate the extent of

economic development, and hence, they have an impact on personal income tax. The price

index also reflects the inflationary crisis in the economy. Therefore, the consumer price index

provides an efficient method of determining personal income tax. The study aims to

investigate the following:

1. To identify the relationship between per capita personal income tax and per capita

GDP in Portugal

2. To determine how population growth affects personal income tax in Portugal 

3. To examine the effects of literacy rates on personal income tax in Portugal

4. To investigate the relationship between inflation and personal income tax in Portugal 

Contribution to Knowledge

The proposed study will have both theoretical and practical applications. However,

before this study, the determinants of personal income tax in Portugal are not analysed.

Therefore, this study will significantly contribute to the existing literature because it will

offer a detailed analysis of the determinants of Portuguese personal income taxation in the

long run. Additionally, the study will provide suggestions to the concerned parties to

establish other jurisdictions on tax regulation to optimize tax revenue and positively impact

the taxpayers.

Limitations of the study 

The proposed study has various limitations. Firstly, quantitative research is time-

consuming, and the researcher may lack enough time to commit to it. Secondly, the data

collected might be of poor quality, which will affect the validity of the results. Thirdly,

inflation data is gathered over a long time from different economic sectors, and thus, it might
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be hard to collect accurate data within the research period. Finally, the quantitative study

requires extra resources to analyse the results to avoid ambiguity in the results.  

LITERATURE REVIEW

Concept 

This chapter analyses past literature on the determinants of personal income tax. It

evaluates studies that have been published in the last five years to easily comprehend the

latest findings in the field and describe how the proposed research is related to previous

studies in statistics. A literature review allows the researcher to illustrate the originality and

relevance of the research problem. Additionally, it enables the researcher to combine the

findings of various investigations conducted in different regions to improve the overall

quality of his study. Consequently, the academician understands the relationship between

independent and dependent variables and gives relevant research findings.

Determinants of Personal Income Tax in Portugal

Personal income tax is influenced by several factors that have varied influence

degrees depending on the intensity of the relationship between the variables. The researcher

illustrates that per capita PIT and per capita GDP is among the determinants of personal

income tax in Portugal. Additionally, population density can have a significant impact on

personal income tax because it offers policymakers an opportunity to increase taxes.

Moreover, literacy rates indicate the levels of economic development, and they have an

impact on per capita personal income tax. Inflation can also be a determinant of PIT because

it affects individuals’ purchasing powers, and the government can be able to increase

personal income taxes whenever public expenditure rises.

Studies

Personal income tax has been widely researched in economic literature because of its

significant contribution towards government funds and the overall economy. For example,
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Rianto, Taufik, and Yam (2017) examined the determinants of personal income tax revenue

and the implication on public welfare development in six regions from 2010-2014. In their

research, the variables included the collection of delinquent of personal income tax, number

of income taxpayers, infrastructure, education, and healthcare development, and employment

rate compliance. To achieve the objectives of their study, the researchers used both empirical

and analytical approaches. The findings indicate that the mentioned variables positively

impact personal income tax. While Rianto, Taufik, and Yam's (2017) article focus on the

determinants of individual income tax, it is essential to the development of the proposed

study.

The study compares to the present research in several ways. For example, although

the investigator obtains data from six regions, it has used based its findings on the same

variables. Additionally, it applies an informative research method because it analyses and

explores the relationship between dependent and independent variables. The application of

this method of research demonstrates that the study will significantly contribute to the

proposed research. Therefore, the article provides a practical understanding of the

determinants of personal income tax in Portugal.

Other researchers have also investigated the determinants of personal income tax. For

example, Palic, Dumicic, and Grofelnik (2017) analyzed the long-run determinants of

personal income in Croatia from January 2008 to February 2016. They use average monthly

income and the number of taxpayers as some of the variables to achieve the objectives of

their study. The researchers also conducted the empirical analysis using the co-integration

method, where they find that economic conditions are inversely related to personal income

tax. They also realize a positive relationship between average monthly salary and the number

of taxpayers with personal income taxes. The differences between their research and the

proposed study suggest that the current research will impact the existing literature. Therefore,
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Palic, Dumicic, and Grofelnik (2017) will significantly contribute to the development of the

anticipated exploration.

Other studies have attempted to demonstrated that both taxation polices and

population density have an impact on personal income tax. For example, Heim, Lurie, and

Pearce (2017) examine the extent to which income tax law and characteristics of the

population led to the decline in taxpaying. They use a sample of tax and information returns

obtained from the people of U.S personal income tax from 2001 to 2003. After analyzing the

trends, they find any changes implemented in tax policy and population characteristics affect

personal income, and hence personal income tax.

Heim, Lurie, and Pearce's (2017) article compares and contrasts with the proposed

research. For example, the two studies point out that demographic factors, such as population,

greatly determine personal income tax. Conversely, Heim, Lurie, and Pearce’s article uses

simulation analysis to estimate the relationship between independent and dependent

variables, while the proposed study uses regression analysis. The works establish a precise

method of understanding the association between the identified variables. Therefore, the

article will significantly contribute to the development of the proposed study.

Some researchers have also attempted to demonstrate that an increase in marginal tax

rates increases personal income tax. For example, Radulescu, Egger, and Rees researched in

2014 to identify what determines the progressivity of individual income tax internationally.

The study uses associates changes in marginal tax rates with alterations in personal income

tax. They use labor supply elasticity, income replacement rates, unemployment, and inflation

as the dependent variables to attain the study’s objectives. They also conduct a detailed

review of existing literature to assess the relationship between the PIT and other research

findings. Their results prove that changes in marginal tax rates impact the continuity of
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personal income tax around the globe. Therefore, Egger, Radulescu, and Rees’ article is

relevant to the proposed study.

Other researchers outline that the literacy rate has a significant impact on personal

income tax. For example, Aronmwan, Imobhio, and Izedonmi (2014) investigate the

determinants of personal income tax compliance. In their study, they use to adopt survey

design as the research method and questionnaires as an instrument of data collection. They

also conduct a detailed review of the existing literature to evaluate the findings of other

investigations. Additionally, the authors use SPPS to electronically analyze data where they

find that literacy levels are inversely related to personal income tax compliance. Therefore,

the article will make a significant contribution to the proposed study.

Some studies attempt to confirm that tax benefits impact personal income tax. In his

2019 study, Krajnak analyses whether selected tax advantages affect revenue obtained from

personal income tax in Czech from 2008 to 2017. He uses different methods of description,

comparison, analysis (regression and correlation analyses) to achieve the objectives of this

study. The outcomes illustrate that some tax incentives, such as tax credit for children,

positively impact tax revenue. Although the proposed study uses quantitative research design,

Krajnak’s article will positively contribute to the evaluation of the existing literature related

to the field of study.

References
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Aronmwan, E., Imobhio, E., & Izedonmi, F. (2015). Determinants of Personal Income Tax

Compliance: Perception of Nigerian Tax Payers. Available at SSRN 2619855.

Heim, B. T. Lurie, I. Z. & Pearce, J. (2017). What drove the decline in taxpaying? The roles

of policy and population. National Tax Journal, 70(3), 585-620.

Krajnak, M. (2019). Do selected tax advantages affect tax revenue from the personal income

tax? Journal of Competitiveness, 11(4), 73-78.

Palic, I., Dumicic, K., & Grofelnik, B. (2017). Analysis of personal income taxation

determinants in Croatia in long-run: Evidence from cointegration analysis. Our

Economy, 63(3), 12-18.

Radulescu, D. M., Egger, P., & Rees, R. (2014). The Determinants of Personal Income Tax

Progressivity Around the Globe.

Rianto, J., Taufik, R., Yam, J.H (2017). Determinants of personal income tax revenue and the

implication on public welfare development (Case study at 6 regions in Jakarta City,

Indonesia capital city during 2010-2014). International Journal of Academic Research

and Development, 2(4), 84-96.