Youth Income Tax (IRS Jovem)

Policy Description and Objectives

The IRS Jovem (Youth Income Tax) is intended for all workers with age below or equal to 35. It consists of a partial exemption on personal income tax, with a maximum time limit of 10 years. The exemption applies to income up to 55 times higher than the Social Support Index (IAS): €28,737.50. It works as follows:

• 100% in the first year of earning income;
• 75% from the 2nd to 4th year;
• 50% from the 5th to 7th year;
• 25% from the 8th to 10th year.

The maximum period of 10 years takes into account all years in which income was earned in categories A (employees) and B (self-employed workers).

Objectives: Increase net income and raise the opportunity cost of emigration for young people.

Final assessment of the measure: Probably ineffective and intergenerationally unfair.

Policy Evaluation from an Intergenerational Perspective:

Policy Effectiveness

• Studies show that income taxation influences the location choices of higher-income workers (Kleven et al., 2014; Akcigit et al., 2016; Kleven et al., 2020).
• However, net wages in Portugal, in terms of purchasing power parity, are lower than in the main emigration destinations.
• In 2024, the average annual net salary for a single worker without children (in purchasing power parity) was €17,819.64. The Spanish salary, which was the closest, was €25,671.89, 44% higher than the Portuguese salary (Figure 1).
• The IRS Jovem is insufficient to align Portuguese net wages with those of destination countries, even in the early years when gross wages effectively equal net wages, assuming a 100% pass-through. In those years, the salary would be €22,833.57, an increase of 28% but still 11% below the Spanish net salary. The opportunity cost of emigrating decreases significantly. However, it may not be enough to retain young people.

Figure 1 – Average annual net salary (PPP) of a single worker without children (2024)

Source: Eurostat and authors’ calculations. 1/ Data for the United Kingdom are from 2023.

Recent Portuguese Emigration

• The United Nations estimates that there are 2.1 million Portuguese emigrants, which is equivalent to more than 20% of the country’s resident population, making Portuguese emigration the highest in Europe in proportional terms of the national population.
• The significant number of young people leaving the country each year contributes to exacerbating the problem of population ageing, which is already considerable in Portugal, as the fertility rate has been below 1.5, well below the 2.1 needed to replace the population.
• As emigration is concentrated among the young population, there is also a reduction in the number of women of childbearing age, exacerbating the dynamics of population ageing.
• There is a direct correlation between opportunities in the labour market and emigration cycles. During the 21st century, Portuguese emigration has been diversified in terms of destinations, with the most common being France, Germany, Switzerland, Spain, the United Kingdom, Belgium, the Netherlands and Scandinavia (Pires et al., 2023), that is, countries with better job opportunities and higher average wages.
• The percentage of emigrants with higher education has been growing, reflecting the increase in the qualifications of the Portuguese population (Pires et al., 2023). In 2021, young emigrants were evenly distributed across the three levels of education (Banco de Portugal, 2025); 31% of emigrants aged 25 to 34 had higher education, compared to 39% of young people in that age group.
• According to Banco de Portugal (2025), Portugal has one of the highest stocks of young emigrants in Europe, which increased between 2011 and 2021. Their statistics consider permanent and temporary emigrants. Temporary emigrants are individuals who aim to emigrate for one year and differ substantially from permanent emigrants in terms of qualifications and characteristics. In Figure 3, we present statistics for permanent emigrants only.

• Portugal had the fifth lowest permanent emigration rate in the European Union in 2023. Portugal’s figure (0.32% of inhabitants) was less than half the EU average for 2023 (0.67% of inhabitants). Even at the peak of emigration in 2013, the Portuguese emigration rate (0.51%) was lower than the EU-27 average (0.55%).
• In 2023, Portugal had the sixth lowest permanent emigration rate among people aged 18 to 35 (1.02%), significantly below the average for 20 countries with data (1.69%). The emigration rate of young people in Portugal peaked (1.41%) in 2013, in line with the simple average of the countries compared (1.43%).

Budgetary Cost of the Policy between 2025 and 2050

To calculate the financial impact of the Youth Income Tax, we cross-referenced the latest data from the Quadros de Pessoal (2022) with the European Commission’s demographic projections. The Quadros de Pessoal includes information on all young people in the private sector working full-time. The European Commission data allowed us to understand how demographic changes would affect tax collection.

The total cost of the policy, assuming it ends in 2050, €30.7 billions (10.8% of GDP in 2024), breaks down as follows:

For the year of 2025, we estimate a cost of €995 million. The Government estimates a budgetary cost of €775 million, while the UTAO forecasts a cost of €644 million. However, both the Government and UTAO estimates are focused on the short-term, and do not consider the long-term costs of the policy.

Assessment of Intergenerational Fairness and Effectiveness

• Increases inequality between generations? Probably yes. The measure will entail an increase in taxes and/or a reduction in public spending to ensure budgetary neutrality, or an accumulation of debt if the government(s) do not want to ensure budgetary neutrality. Either situation will have negative impacts on future generations, with uncertain positive impacts on the Portuguese economy. The measure may also lead to lower gross wages for new hires and lower pensions in the future if employers decide to adjust future gross wages to equalize net wages between generations. Finally, the measure discourages young people from saving, as the incentive comes from income tax deductions.
• Increases intragenerational inequality? Yes. By setting a limit at 35 years of age, the measure creates inequalities between individuals who are only months apart in age. It also creates inequalities for those who decide to study for longer (e.g. to obtain a PhD) and will not be able to take advantage of the ten-year income tax discount.
• Reinforces the transmission of inequalities across generations? Probably yes. Progressive income taxes are one of the main fiscal tools for directly reducing income inequality. By reducing the progressivity of personal income tax, after tax inequality among young people will increase, and this will be passed on to their children. In addition, tax collection makes it possible to reduce inequality through the redistribution of public expenditure (e.g. through social transfers). Lower tax collection could lead to less redistribution of public expenditure/less investment in future generations.
• Limits the choices of future generations? Yes. The cost of the IRS Jovem would initially be around €925 million per year (0.32% of GDP), reaching €1.4 billion in 2050 (0.33% of GDP). As a member of the European Union, Portugal signed the Stability and Growth Pact, which states that countries with public debt exceeding 60% must try to reduce their debt. Public debt was 94.9% of GDP at the end of 2024. The measure requires greater restraint in public spending/tax increases, which will limit the choices of future generations.

Final assessment: Probably ineffective and intergenerationally unfair.

Recommendations

Develop policies that create better wages and reduce youth unemployment

There are several active labour market policies that would sustainably increase wages and significantly and permanently reduce youth unemployment. For example:

• The government could change the current social agreement, which provides for wage increases of around 5% per annum to a larger increase, and allow companies to deduct the cost of wage increases for young workers from their corporate income tax (IRC).
• Combat youth unemployment (20.5% of young people aged 16-24) by creating tax incentives such as waiving social security contributions for a period if the company hires young people who have been unemployed for a long time (12 months).
• The government could introduce specific tax incentives for companies that offer starting salaries above a level agreed in advance through social dialogue. The initial salary increase would have the potential to retain more highly qualified talent in Portugal, thereby promoting higher and sustained productivity over time.
• The public sector could play a crucial role by setting a competitive example in terms of wages. A detailed technical review of the wage scales for young workers in the public sector, adjusting them to more competitive levels in relation to the private sector, could generate indirect pressure on the private labour market, encouraging companies to raise their wage levels as well. This measure would need to maintain the current public wage bill (fiscally neutrality).

These alternative policies have clear advantages over the IRS Jovem, especially in terms of intergenerational fairness and lasting increases in economic productivity. Unlike the IRS Jovem, whose benefits are temporary and fiscally costly in the long term, the proposed measures would generate permanent and structural wage increases, leading to sustainable increases in productivity and future tax revenues, as well as retaining the most skilled workers in the country. The government could thus reinvest the additional revenue in broader tax cuts, strategic investments in essential infrastructure and public services, or even in the sustainable reduction of public debt.

To ensure that none of these policies created or exacerbated intra-generational inequalities, detailed studies would have to be carried out prior to their implementation, with rigorous monitoring and periodic adjustments as necessary, ensuring an equitable distribution of benefits among the various social groups.

Develop a mix of policies involving circular and permanent migration

The movement of migrants is often circular, with migrants travelling repeatedly between their country of origin and their destination country.

For countries of origin, circular migration helps alleviate labour oversupply. In addition, it can bring financial benefits through remittances, as circular migrants tend to retain more of their savings in their country of origin than permanent migrants. Furthermore, when these migrants return to Portugal, they can bring new skills and ideas with them; migration becomes a process of “brain gain” rather than “brain drain”.

To attract the return of emigrants, policies are needed that reduce investment costs for them. Emigrants often do not return due to a lack of investment opportunities for their remittances.

Publishing Date: 2025-12-22