OECD Tells Portugal: Cut Taxes on Low Wages, Tax Property Instead — But No Government Wants to Do It

The OECD's latest economic review of Portugal lands with a challenge that is simultaneously obvious in its logic and treacherous in its politics: tax property more, tax wages less. The organisation's Fundamentals for Growth and Competitiveness 2026 report, published this week, identifies Portugal's labour-heavy tax structure as a structural drag — particularly for low-wage workers — and points to relatively low recurrent property taxes as an underused lever. It is a technically sound recommendation. Turning it into policy is another matter entirely.

The Diagnosis: Labour Taxes Are Doing Too Much Work

Portugal's tax system leans heavily on employment. For low earners especially, the combined burden of income tax and social contributions creates a wedge between what employers pay and what workers take home — a wedge that depresses hiring, pushes activity into the informal economy, and punishes precisely the segment of the workforce that can least afford it. The OECD's prescription is a rebalancing: ease the load on wages, recover the revenue through higher recurrent taxes on property, and strip out the ineffective tax benefits that inflate complexity without delivering clear economic value.

In isolation, the arithmetic is defensible. Recurrent property taxes — the kind levied annually on ownership, not just at the point of sale — are generally considered less distortive to economic activity than taxes on labour or consumption. Portugal's IMI (Imposto Municipal sobre Imóveis) rates have historically been modest, and valuations have in many cases lagged well behind market reality. Bringing those valuations closer to current prices, as the OECD also recommends, would widen the tax base without necessarily raising rates — though for many homeowners, the practical effect would feel identical.

The Housing Equation: Prices Up 92%, Wages Up 42%

The OECD's property tax recommendations cannot be read in isolation from its separate — but deeply connected — diagnosis of Portugal's housing crisis. Since 2019, residential prices in Portugal have risen by 92 percent, while average net wages have grown by just 42 percent. That gap is not a rounding error; it represents a structural repricing of access to shelter that has locked many young Portuguese out of ownership and driven renters into an increasingly expensive market.

The report identifies housing as a major constraint on both economic and social development, limiting labour mobility and concentrating growth in coastal corridors while leaving workers unable to follow opportunity. The recommended remedies go beyond taxation: simplify construction licensing across municipalities, expand social housing for rent, and update property valuations regularly. These are sensible, incremental steps — but they operate on a timescale of years, while the affordability crisis is acute today.

For Residents and Expats: What Is Actually at Stake

For the many foreign nationals who have bought property in Portugal over the past decade — often attracted in part by a favourable tax environment and relatively low carrying costs on ownership — higher recurrent property taxes would represent a material change to the calculus that brought them here. Portugal has long competed for mobile residents partly on the basis of that fiscal environment. Any significant shift would need to be weighed carefully against that competitive positioning, particularly as neighbouring Spain and emerging markets continue to court the same demographic.

For Portuguese workers on low wages, the promise of labour tax relief is tangible and long overdue. The difficulty is sequencing: governments can raise property taxes with a stroke of a pen, but the political cost of doing so while simultaneously delivering visible wage relief requires a level of coordination and trust that Portuguese fiscal politics rarely sustains across a full legislative term.

The Political Ceiling

Higher property taxes are among the least popular policy instruments in any democracy, and Portugal is no exception. Homeownership rates remain high, particularly among older voters, and the image of the state reaching into household balance sheets to capture paper gains in property values is one that opposition parties reliably exploit. The current government has shown little appetite for the fight. The OECD's recommendation will be noted, cited in academic papers, and quietly filed. Whether it moves from report to reform depends less on economic logic than on whether a future government decides the political cost is worth paying — and whether, by then, the housing crisis has become severe enough to make inaction the more dangerous option. On the housing front, a recent APPII report highlights a persistent housing supply crisis. For a full breakdown of how the current system works, see our comprehensive guide to taxes in Portugal. Reform implementation faces political headwinds — the CGTP has called a national strike against the government's labour package. Structural reforms are more urgent given the proposed 12 per cent reduction in Portugal's EU budget envelope.

The political deadlock is illustrated by parliament's rejection of a PS resolution on cost-of-living relief.