Opinion – Nelson Barbosa: About the Income Tax table

Election year revives the debate on Income Tax on Individuals (IRPF). The fact that the tax table on personal income has not been corrected since 2016 also stimulates the discussion, as the accumulated inflation since then is expected to reach 46% (assuming a 7% variation in the IPCA this year).

In the last election Bolsonaro promised to correct the table. Four years have passed and he has done nothing. Lula has already announced that, if elected, he will correct the table, in a percentage to be defined according to the government’s fiscal situation.

Can you trust Lula’s promise? I think so and I point out a fact (not an opinion): after an adjustment period, in 2003-04, the PT governments (Lula and Dilma) corrected the IRPF table in every full year of government, from 2005 to 2015.

In 2016, the Dilma government sent a new correction proposal to Congress, at 5%, to be offset by the taxation of profits, dividends and large inheritances (PL 5205/2016), later abandoned by the Temer government.

To be fair to Temer and Bolsonaro, they were not the only ones to keep the IRPF table frozen for a long time. Fernando Henrique also did this, keeping constant values ​​from 1996 to 2001. It was only in 2002, the last year of the Tucano government, that there was a correction. But let’s look ahead.

What should be the correction of the IRPF table in 2023? Opinions vary depending on who you ask. Taking 1995 as a reference, Sindireceita (Sindicato de Analistas Tributários) calculates a lag of approximately 133% in relation to the accumulated inflation since then.

Leaving economês, to close the gap calculated by Sindireceita, the IRPF exemption range would have to rise from R$ 1,903.98 today to R$ 4,436.27 in 2023. As for correcting the IRPF table only for accumulated inflation in 2016-22, the exemption range would have to rise to BRL 2,775.81 in 2023.

How much would the fix cost? Again, according to Sindireceita, closing the gap would increase the disposable income of families, basically the middle class, by R$ 53 billion. To put the number in perspective, according to estimates by my colleague Manoel Pires, from FGV, maintaining aid to low-income families at an average amount of BRL 600 per month would cost around BRL 60 billion in 2023.

Given that the government budget is limited, what should be the policy choice? Before giving my opinion, it is good to clarify two things. First, I support and vote for Lula, but I do not speak for his campaign.

Second, whether via correction of the IRPF table for the middle class or income transfer to the poorest, part of the fiscal stimulus returns to the government in the form of collection, as families will spend part of the increase in income (what we economists call the effect multiplier).

Returning to the question: the government should do both in 2023. Maintain the income transfer budget at the equivalent of R$ 600 per month, but improving the allocation of the resource, and correct the IRPF table in something between 46% and 133%.

Even after the multiplier effect, the two measures will increase the primary deficit, and this will have to be compensated later on. The obvious form of compensation is to increase taxes on the richest, which was the proposal of the Dilma government back in 2016. This will probably be the path adopted by an eventual Lula government.

In the case of Bolsonaro, I record that he tried to do the same thing with his IRPF proposal at the end of 2021, but political pressure from those who would be burdened spoke louder and barred the project. Some things are nonpartisan in Brazil.