The limitations of the youth tax relief scheme that the IMF has asked Portugal to abolish

The debate on the Budget Bill is in full swing and the proposal on wages for the under-35s is gaining traction. The generational problem is enormous. Between 2019 and 2024, according to Istat, the net balance between Italian citizens aged 25–34 leaving the country and those returning was negative by 161,000 people, almost 27,000 ‘individuals’ per year. According to the INPS’s 2025 Observatory on Employees, in 2024 the average gross salary of a private-sector employee aged 25–34 was around 18,000–22,000 euros. Thus, to increase young people’s disposable income and make it more affordable for them to stay in the country, some political parties have put forward the same proposal in more or less different forms: to tax them less.

Deputy Prime Minister Antonio Tajani has adopted the ‘no tax area’ for those aged up to 35, which his colleague from Forza Italia and President of the Calabria region, Roberto Occhiuto, had already proposed in recent months under the name ‘Smart Tax’ and which he relaunched last Saturday at the Festa del Foglio in Florence. Matteo Renzi, for his part, had already proposed the Start Tax – adopted by the broad coalition – which provides for three reduced rates of 10, 20 and 30 per cent (instead of the standard 23, 33 and 43 per cent) for those under 35: the cost? 10 billion euros. Economy Minister Giancarlo Giorgetti, on the other hand, spoke of a ‘tax advantage’ that would operate as an ‘incremental flat tax’ on increases in young people’s salaries, to be included in the budget.

To assess these proposals, it is worth looking at Portugal’s experience. A tax relief scheme for the under-35s already exists there, but staff at the International Monetary Fund have repeatedly recommended that it be abolished. It is called ‘Irs Jovem’ and currently exempts employees and the self-employed under 35 from paying Irs (the Portuguese equivalent of IRPEF) on a portion of their income during their first ten years of work, up to a maximum of 29,500 euros. In the first year, all income up to that threshold is exempt; from the second to the fourth year, 75 per cent is exempt; from the fifth to the seventh year, 50 per cent; and from the eighth to the tenth year, 25 per cent. Firstly, the cost. The Portuguese Ministry of Finance states that revenue lost due to income tax exemptions has more than doubled in a year, from 451 million euros in 2024 to 961 million in 2025, and that the increase is ‘predominantly’ due to the ‘Irs Jovem’ scheme, which was extended in 2025 at an additional cost of 525 million euros (approximately 0.2 per cent of Portugal’s GDP; the equivalent percentage of Italy’s GDP would be around 3.9 billion euros, for the extension alone).

The International Monetary Fund has no doubts about the measure’s limited effectiveness. In 2024, IMF staff wrote that age-based tax relief rates “are costly” and their effectiveness in curbing emigration “is uncertain”. And this year it has moved on to an explicit request: in the Article IV report on Portugal, the Fund states that these exemptions complicate the tax system, are distortive and “should be revoked”; a request to which the Portuguese government responded by agreeing to reduce the concessions “as far as possible”, whilst stating that it considers the discount for young people “important for stemming emigration”, without, however, citing any figures. In reality, the number of permanent Portuguese emigrants of all ages fell from 90,052 in 2024 to 84,579 in 2025, but remains above the 2023 level, and the decline does not reflect the effect of the exemption.

The Fund has called on the government to ‘revoke’ the income tax exemptions granted to young people, because they ‘increase the burden on the budget’ and lack ‘evidence of effectiveness’ in curbing emigration. Above all, however, these tax breaks do not directly increase labour productivity – which lies at the heart of the income gap with the eurozone, a gap the Fund considers a “key factor in emigration”. An exemption raises net pay for a few years, but not gross pay.

None of the Italian suggestions is exactly the same as the Portuguese one, but the logic and limitations are the same.