Congress reinforces inequality for 30 years and IR tightens middle class

Almost all tax measures proposed or analyzed by parliamentarians since the 1988 Constitution were aimed at increasing the regressiveness of taxes or creating exemptions and special regimes for specific groups, worsening income inequality in Brazil.

In this context, it is the middle class that has been squeezed for more than three decades with the increase in the burden of the Personal Income Tax (IRPF).

From the end of the military dictatorship (1964-1985), the weight of the IRPF decreased for those at the top of the pyramid, but practically doubled for those earning between three and five times the average income.

Two recent studies shed light on these two movements from the 1988 Constitution onwards, explaining with data how tax injustice and the burden on the middle class walked together in Brazil.

Between 1989 and 2020, parliamentarians proposed or analyzed 4,841 projects, provisional measures or proposed amendments to the Constitution in the tax area. Only 5% (247) of these propositions were progressive, in the sense of taxing the richest strata or alleviating the poorest (as in the exemption of basic food basket products).

Of the total, 67.2% of the proposals created deductions or exemptions from the Income Tax, IPI or special regimes to benefit groups, specific productive sectors and municipalities.

“Of every 100 proposals with tax changes, 67 sought to benefit some group, contributing to increasing inequality rather than reducing it”, conclude Eduardo Lazzari, Marta Arretche and Rodrigo Mahlmeister in a survey by the Center for Metropolis Studies, at USP, with support from Samambaia Filantropias.

In the post-dictatorship period, the Brazilian Congress designed a model of broad social inclusion based on increased public spending. But it did not adopt progressive taxation, and increasingly sought resources among the poorest, with consumption taxes. At the same time, year after year, exemptions for specific groups were adopted.

The researchers list some reasons for the increase in inequality via taxes:

1) High dependence on taxes on products and services, leading the poor to pay proportionately more, as a percentage of income, than the rich (in the last decade, 30% of the total tax burden came from these taxes, compared to 10% on average across countries the Organization for Economic Co-operation and Development, which represent 60% of global GDP);

2) Small incidence of taxes on property, with only 5% of revenue generated from taxes on vehicles, property transfers, donations and urban and rural properties;

3) Low taxation, proportionally, on the income of the richest via IRPF and loopholes to convert high salaries into capital income, with lower collection on legal entities (leading to the pejotization of professionals with higher incomes).

In recent years, Brazil has also extended tax incentives to dozens of groups and sectors, such as the Manaus Free Trade Zone and non-profit entities. As of 2003, these exemptions practically doubled, to around 4% of GDP, reaching more than R$300 billion a year.

“Over all these years, in all political currents, there has been an increase in benefits to certain sectors or groups that communicate with parliamentarians, giving them electoral advantages”, says Marta Arretche, from the Department of Political Science at USP.

“Those who benefited know how much they stopped paying [em impostos] and who favored it. But the bill is diffused to society, translating into fewer resources for social policies or investments.”

Last year, the Ministry of Economy sent to Congress a bill (PL 2,337/2021) that raised the exemption limit for the IRPF (from the current R$ 1,903.98 to R$ 2,500) and instituted a 20% rate on profits. and dividends, with an exemption floor of R$ 20 thousand.

Considered progressive in tax terms, but bombarded by more than a hundred business associations, the proposal was dehydrated in the Chamber and did not prosper in the Senate.

Another work, by Made (USP’s inequality research center), shows that, of 118 laws passed that modified the IRPF between 1947 and 2020, only 15% had the alleged objective of altering income distribution.

The survey also reveals that, after the 1988 Constitution, the difference between how much the richest and the middle class actually pay in IRPF has narrowed.

In 1988, those earning about 15 times more than the average income in the country effectively paid 27.5% of income tax. Today, it collects less: 25.3%.

On the other hand, those earning three times the average income saw their effective IR jump from 8% to 16.6% — and from 13.2% to 21% among those earning five times the average.

The loss of tax progressivity explained in these percentages does not consider exemptions, rebates and deductions, and may be even greater.

“In the last decades, the middle class ended up flattened in a regressive tax environment. In relation to the dictatorship, it currently pays much more IR, which explains a certain nostalgia of some in relation to the military regime”, says Nikolas Schiozer, author of the work of Made-USP, carried out with João Marcolin, Isabella Bouza and João Pedro Leme.

Between 1975 and 1976 (in the dictatorship), there were efforts to increase progressivity in the IR in response to criticism that the “economic miracle” (1967 to 1973) made the country grow, but increased inequality.

“In redemocratization, the subject [redução da desigualdade via IRPF] disappears from the agenda and the list of approved measures, even in PT governments”, says Schiozer.

For Manoel Pires, coordinator of the Observatory of Fiscal Policy at FGV Ibre, despite the diagnosis that the tax system is becoming more unfair and regressive, the political economy has gone in the direction of making it worse.

“From the point of view of merit, it is difficult to find someone who does not defend tax progressivity. But it is always an unsympathetic debate, because nobody likes to pay taxes”, he says.

“The way out to increase collection has been to tax consumption, a more ‘hidden’ alternative than directly encumbering income or property.”

The result is that, proportionately, those who earn less pay more taxes — increasing tax regressiveness and inequality.