Countries compete to keep skilled young workers

In 2020, Portuguese software engineer Duarte Dias accepted a job offer from Microsoft's Dublin subsidiary. A little over a year later, he joined Microsoft's team at its Seattle headquarters, where he has worked ever since.

Although Mr. Dias misses the relaxed Portuguese lifestyle and the family-like team spirit in his work environment, he has no regrets about choosing to pursue an international career. A significant factor driving his decision was the economic benefits of moving abroad.

After a detailed financial analysis, Mr. Dias found that staying in Portugal was not economically viable. He stated, "I simulated how much money I could save each year in Portugal and quickly realized that even if I got the highest-paying job within the engineering field's experience range, I wouldn't be able to live a comfortable economic life."

During his master's degree at Instituto Superior Técnico in Lisbon, Mr. Dias gained two years of work experience in Portugal, which further solidified his conviction. At that time, his annual income was 35,000 euros (approximately $36,000 or £29,000), but his actual take-home pay was much lower because he had to pay up to 40% in income tax. He recalled, "The economic situation was bad. It was hard to save money if I didn't live with my parents."

Moving to Ireland meant an immediate boost to his salary prospects, almost doubling to 60,000 euros. In the United States, the situation was even better, with his pre-tax income now exceeding $160,000 and an income tax rate of only 20%, far lower than in Portugal. Mr. Dias plans to return to Lisbon in two years with "more savings."

How to retain skilled workers like Mr. Dias has been a concern for successive Portuguese governments. In 2020, the government led by Socialist leader António Costa introduced the "Young Personal Income Tax" (IRS Jovem) program, offering tax breaks to workers under 30, graded according to education level. Official data shows that 73,684 taxpayers benefited from it in 2022.

Following the snap elections in March, the new center-right Portuguese government led by Luís Montenegro stepped up efforts, extending the program's duration from 5 to 10 years and expanding it to all workers under 35, regardless of their education level. The Portuguese Finance Ministry stated that the proposal, passed by the Portuguese parliament in late November, is expected to benefit up to 400,000 workers.

But experts say this may not be enough to stop young people from going abroad. Sérgio Vasques, a tax law professor at the Catholic University of Lisbon, said, "It is unlikely that the tax system alone will keep young workers in the country, whether due to more career opportunities abroad or because this tax benefit only applies to incomes below 28,000 euros per year."

He pointed out that the Portuguese government still extracts more tax from the wages of ordinary workers than most wealthy countries. Portugal's tax wedge, the ratio between the amount of taxes paid by an average single worker without children and the corresponding total labor cost for the employer, is 42.3%, ranking eighth among the OECD's 38 member countries. Vasques added, "This is a tax system that is hostile to qualified work and career success. This system does not solve the problem."

Mr. Vasques, who served as Secretary of State for Tax Affairs in the early 2010s, added, "I also cannot imagine a young professional deciding to move to Portugal simply because they have a few hundred euros more at the end of the year. Even low-skilled workers would not make a decision based on this. Portuguese cuisine as an incentive might be more effective than this tax system."

Rita de la Feria, Chair in Tax Law at the University of Leeds, cautioned that the outflow of young people is not just a Portuguese problem, and Europe is also struggling to cope with the challenge of youth migration. According to a study commissioned by the Portuguese parliament, as of July, Portugal, Poland, and Croatia were the only countries in the EU with special tax regimes based on the taxpayer's age.

She said, "The challenge is very clear: worker mobility is higher. The problem is that countries spend a lot of money on training, but as soon as they enter the labor market, they leave for other countries." De la Feria, who moved to the UK when she was young, told the BBC that when she left Portugal, she did not intend to "leave forever: many people leave their country of origin thinking they will return at some point. But once they start a family, it is almost impossible to return."

António Almeida, a software engineer like Mr. Dias, left Portugal in late 2020 during the pandemic, heading to Berlin to work immediately after completing his studies. Two years later, he swapped the German capital for Brussels. All of his work experience has been gained abroad. Almeida said, "In 2020, we were earning 1,300 euros a month (before tax) in Lisbon. Berlin offered 4,200 euros for a junior position."

Even with 40% income tax in Germany, the net income was significantly higher. Almeida said, "It wasn't a difficult decision." Now in Belgium—where he emphasizes that taxes are even higher—returning home is not a priority. "I will eventually consider going back, mainly for family reasons. But currently, my standard of living is high, and I like the lifestyle in Central Europe. The main problem in Portugal is low wages, not taxes."

Mr. Almeida does not consider Portugal's tax changes to be a major factor in weighing the pros and cons of returning home. "Until today, I have never considered it." Mr. Dias also agreed: "Salaries outside of Portugal are always higher, and those who have no personal or family ties to Portugal will not have any economic or professional incentive to stay there."