[fddr]

It is not quite that bad. Tax withholding rates are not marginal, they do apply to the whole salary. But the actual tax rates at the end of the year are marginal. So it is possible a pay raise means you get less money after witholding on a monthly basis, but on an yearly basis, after taxes paid/refunded, a pay raise is always net positive.

Still silly, but not insane.

[bogomipz]

But that's essentially a big no-interest loan people are giving to the government no? The money returned at the end of the year is money people could have been investing and earning a return on no? That seems closer to "insane" than "silly." Or am I missing something?

[fddr]

You are not wrong, except it's not usually a big loan. The witholding rates are chosen so that in most cases what is withheld is close to your final tax bill.

In all countries I know of, tax withholding is not a perfect match to final tax bill, and that could amount to a no-interest loan to government like you say. Not sure if in practice that loan is unusually large in Portugal, could be.

[fyfy18]

From the other side of the table, that is money the government is investing and earning a return on. If they did it the other way they'd have to raise the tax rates to compensate, which wouldn't go down for the politicians doing it, even if the net result is the same.