The process of fiscal consolidation and the need to step up the poor long term economic performance provide an opportunity to implement tax measures to improve efficiency and rebalance the economy. As consolidation progresses, switching taxes from labour to consumption and property offers an avenue to regain eroded competitiveness and to achieve employment gains, especially if the largest reductions of the labour tax wedge are targeted on low-wage workers. As the consumption tax base is particularly large in Portugal, such a shift could allow a sizeable cut in the tax wedge while still raising revenue, if needed. Productivity and welfare can be increased by simplifying the tax system, thus reducing the high compliance costs it imposes, especially on small and medium sized firms. Also, the tax system could be more environment-friendly by using it to further address transport-sector externalities, which are of particular concern in metropolitan areas. At the same time, the current tight budgetary pressures call for increased efficiency in tax collection. There is ample scope for base broadening through reduced tax expenditures in the major direct and indirect taxes, as well as in property taxation. This Working Paper relates to the 2010 OECD Economic Survey of Portugal (www.oecd.org/eco/surveys/portugal).
