Opinion – Solange Srour: Not every tax cut is welcome

In recent months, several countries have announced measures to mitigate the economic and social impact of the sharp rise in energy and food prices. Measures that, if implemented without an adequate design and without respecting the institutional framework, could result in large fiscal costs, exacerbate the mismatch between demand and supply and generate higher inflation and lower growth.

Government interventions to deal with the impacts of price increases can be categorized into price policies and income policies. The former aim to directly reduce the price, including reduction of taxation, subsidies and even direct interference in the definition of prices. Income policies, on the other hand, cover some form of compensation to consumers, that is, cash or indirect transfers, such as vouchers.

Income policies, generally aimed at the most vulnerable families, have several advantages over price policies. The main one is the ability to focus the effects on those who need it most and, with that, avoid wasting resources. Pricing policies have several disadvantages, the most serious of which is the destruction of the role of prices in signaling the relative scarcity or abundance of a good or service.

When, for example, the price of gasoline is artificially reduced, not only is its consumption encouraged –precisely when there is a mismatch between supply and demand (which may lead to shortages)– but it also induces the inefficient use of economic resources, curbing search for alternative fuels.

The proposals that limit ICMS and exempt PIS and Cofins under discussion in Congress, even if they have meritorious justifications, do not fulfill the role of helping those who are being most impacted by inflation, in addition to increasing fiscal risk, interfering in the budget planning of entities subnational and bring relevant challenges to the government that takes over the country in 2023.

The argument of urgency does not apply at this moment, since it will not be the poorest who will benefit the most. Among the items in question, only cooking gas has a significantly greater weight for low-income families. In the case of fuel, the weight in the budget of families with a monthly income of up to two minimum wages is only 2.8%. In the case of electricity, the social tariff created in 2020 offers discounts for low-income consumers and has since been accompanied by a reduction in ICMS by several states.

The tax reduction permanently affects the revenue of states and municipalities. Although it is now being driven by energy and fuel prices, the collection will respond to a future price drop, bringing relevant imbalances in the finances of subnational entities. A major judicialization involving the budgetary impacts and the proposed compensations is expected.

It is a fact that ICMS has many dysfunctions: high cost of compliance given the large difference in rates between goods and between states (resulting in high tax evasion), tax war (which causes allocative distortions) and a high level of litigation between consumers and the tax authorities – for cite the main ones. It is also perfectly questionable whether items as basic as electricity can be taxed above 30%.

However, the ICMS reform should be carried out within a broader tax discussion seeking efficiency, increased competitiveness and balance of public accounts. Unfortunately, we missed this opportunity last year with the abandonment of the proposal to unify ICMS, PIS, Cofins and ISS, although this had the support of the States.

Finally, a PEC is proposed in order to exempt the government from complying with spending ceiling and fiscal responsibility law. Yet another weakening of the fiscal framework in the midst of an electoral debate that is funneling towards the adoption of looser rules and even their abandonment.

The argument that all countries are adopting policies to alleviate the rise in prices does not exempt us from understanding Brazil’s idiosyncrasies – such as our fiscal fragility and severe social inequality.

If all the proposals are implemented, we will be one of the countries to spend more on subsidies as a proportion of GDP. It would be much more efficient to increase targeted transfers, financing them with a cut in the existing voluminous tax benefits. Moments like the current one should serve to strengthen the sense of urgency for a comprehensive tax reform.