‘To avoid tax, Brazilians turn to companies and increase inequality’, says economist

Brazil is one of the countries with the most regressive taxation in the world, which leads the poor to pay proportionally more taxes than the rich. In recent decades, there have been minimal attempts to reverse the situation, in the sense of more progressive taxation.

To help technically qualify this debate, economist and former Secretary of Economic Policy Manoel Pires launched the book “Tax Progressivity and Economic Growth”, with the collaboration of several authors.

The work makes an in-depth diagnosis of the tax system and presents solutions, many based on the best international experiences. “The intention is to deepen the discussion for when the opportunity for a tax reform appears”, says Pires.

The book was supported by Samambaia Filantropias and can be accessed free of charge on the website of the FGV Ibre Fiscal Policy Observatory, coordinated by Pires.

Brazil is famous for its income inequality, but it still has one of the most regressive tax systems in the world. What explains the lack of actions towards greater tax justice? There is a set of elements that culminate in a very uneven Basil. The tax system is one of them, in addition to the difficulties of advancing in topics such as education. There are lobbies of economic groups that generate benefits for themselves and that end up preventing a greater democratization of the Budget. There are many explanations.

We made the book from this scenario of enormous inequality, which after a decade and a half of some reduction has started to increase again. This in a context of low growth.

The objective was to seek elements for a progressive tax reform that generates growth, as it is much easier to distribute income with the economy growing.

Unlike consumption taxation, where there are already mature proposals that generate little technical controversy, in the case of a progressive income tax there is still much discussion, with many contradictions about the effects of this reform.

About what the economic effect of taxing dividends would be, or how a wealth tax might fit into the tax system.

What would be the vectors for more progressive taxation that would alleviate consumption taxes, which weigh more heavily on the poor? From an international point of view, there is a whole discussion about how to create competitive systems for companies. If we do not follow this trend of reducing the burden on the private sector, we will lose competitiveness.

In some countries, this has been accompanied by an expansion of the revenue base, so that governments do not lose revenue. What there is, typically, is taxation on profits and dividends. And Brazil is one of the few countries that does not tax this, something clearly associated with our inequality.

In domestic terms, individual taxation in Brazil has become very regressive at the top of income. Who is at the top pays less [proporcionalmente] than who in is in the middle of the distribution. Those at the top have more than 50% of their income associated with profits and dividends, and it is not taxed.

Another issue is that, depending on how you structure your professional activity, there is what we call horizontal inequality: people with the same income being taxed differently.
In a way, it would be necessary to act on these two dimensions, increasing the progressivity of the system and treating equals equally.

As capital in Brazil is being taxed less, people are becoming companies. This produces a reconfiguration of the system and ends up generating sources of inequality, with people who earn more being taxed less.

Progressive reform could generate greater growth, taxing those at the top a little more and taxing those at the bottom a little more.

In estate taxation, we have room for an inheritance tax [no Brasil, o Imposto sobre Transmissão Causa Mortis e Doação varia de 2% a 8%, dependendo do estado]. Countries with higher taxation on property end up seeing a little higher economic growth. Because it doesn’t distort the economic decisions of companies and households as much as you tax the stock [o patrimônio, não o fluxo financeiro].

Another item is the tax on large fortunes. Few adopt it, and OECD simulations [Organização para a Cooperação e Desenvolvimento Econômico] show that it is possible to have a good level of progressivity without necessarily using this tax.

Recent research has shown that, since the 1988 Constitution, only 5% of tax proposals in Congress have been in the direction of progressivity. Our tax voracity took place via consumption. Not even in a left-wing and popular government like Lula’s has progressivity been adopted. What explains? The discussion about taxes is always unfriendly, because nobody likes to pay. Therefore, our intention is to deepen the discussion for when the opportunity for a tax reform appears.

What I saw in the discussion of the Income Tax reform last year was a very large political and technical dispersion on what the Brazilian tax system should be.

The measures taken by the Lula government were aimed at consolidating a fiscal adjustment from 2002 to 2003. This replicated the process of the 1990s, when the country needed to finance increasing expenditures. These were fundraising measures.

In a way, with the economy gaining strength from 2005 onwards, the improvement in income distribution, the job market and the expansion of Bolsa Família ended up delaying the sense of urgency of this discussion.

The windows of opportunity for such a discussion are very difficult to construct.