Why business owners generally pay less tax than their employees in Brazil

“I, as the CEO of the company, pay less tax than a cashier at my company. That’s a shame.”

It was with this comparison that businessman Sergio Zimerman defended, in an interview with the newspaper O Estado de S. Paulo on Monday (7), a reform of the Brazilian tax system.

Using a personal example, the founder of the Petz pet store chain argued that an emphasis on collecting taxes on consumption —instead of income or wealth, for example—concentrates wealth.

In fact, the poorest in Brazil pay proportionately more taxes than the richest. This is a dynamic that goes in the opposite direction of what the Constitution says, according to which, “whenever possible, taxes will be graduated according to the economic capacity of the taxpayer” (Article 145). In other words, those who earn more should pay more.

Below, BBC News Brazil discusses in three graphs some of the distortions that explain why the country’s set of tax rules penalizes the poorest and allows, in some situations, business owners to pay proportionately less tax than their own employees.

Taxation concentrated on consumption

In 2021, the government collected BRL 2.94 trillion in taxes. Most, 43.5%, came from the collection of taxes on goods and services.

An amount of R$ 1.28 trillion, including the taxes levied by the three spheres: municipal (ISS), state (ICMS) and federal (IPI, PIS/Cofins).

The emphasis of the Brazilian tax system on consumption taxes is typical of countries with low socioeconomic development, explains professor of tax law at the University of Leeds Rita de la Feria.

“Countries with a higher level of development tend to give more importance to taxation on the income of individuals”, she points out.

For comparison purposes, taxes on goods and services represent an average of 32% of total revenue among OECD (Organization for Economic Cooperation and Development) members, a share more than ten percentage points lower than in Brazil.

One of the reasons for the divergence, according to the expert, is the fact that countries with a lower level of development, which generally have a large portion of the population with very low incomes, have a more restricted universe of taxpayers for income tax. .

Another reason comes from the complexity of income taxation. Many developing nations have a very small and underdeveloped tax administration and therefore prefer consumer taxation, which is easier to implement.

“But this is not the case in Brazil”, emphasizes the expert. “The tax administration in Brazil is very developed. Perhaps because the tax legislation is so bad, the country had to adapt and improve the administration”, she adds.

The option of taxing consumption more than income has a direct practical effect on inequality: it weighs more heavily on the poorest. In the jargon of experts, it is a modality considered “regressive” — “progressive” taxes, in turn, are those that contribute to reducing inequality.

The weight of indirect taxation on the poorest

A practical example: a Brazilian who receives a minimum wage per month and a millionaire who buys a R$20 shampoo in a supermarket pay the same 44.2% in taxes on the value of the product, according to the IBPT (Brazilian Institute of Planning tax). In this situation, as a proportion of monthly income, the poorest pays more than the richest.

The distortion is visible in works such as the one published this year by researchers at the Institute for Applied Economic Research (Ipea) Felipe Moraes Cornelio, Theo Ribas Palomo, Fernando Gaiger Silveira and Marcelo Resende Tonon.

The calculation of the impact of these taxes on household income shows that the poorest 10% pay the equivalent of 21.2% of their income in “indirect taxes”.

For the richest 10%, indirect taxes represent a significantly lower percentage of total income, 7.8%, taking into account per capita family income.

The country’s consumption taxation system, in the assessment of Rita de la Feria, is “one of the worst in the world”.

The specialist, who worked on Portugal’s tax reform between 2010 and 2011 and then followed that of countries such as Angola, Mozambique, Uzbekistan and Albania as a consultant to the IMF (International Monetary Fund), closely follows the debate in Brazil. She attended a congressional hearing in 2020 as a guest at the Joint Commission on Tax Reform and says she hopes to return to discussing the matter soon.

There is great expectation that the tax reform will be one of the first issues touched upon by the third term of president-elect Luiz Inácio Lula da Silva (PT). In his government program, the Lula/Geraldo Alckmin ticket pledged to “simplify and reduce consumption taxation”.

The idea of ​​simplification is already present in some of the proposals that are being processed in Congress, among them the PEC (proposed amendment to the Constitution) 45, which provides for the creation of a Tax on Goods and Services (IBS) to replace the IPI and PIS and Cofins (federal), state ICMS and municipal ISS. The inspiration is the VAT (Value Added Tax), adopted in several countries.

PEC 110 also provides for the institution of a type of VAT — in this case, in a dual regime, one under the jurisdiction of states and municipalities and the other federal.

To the report, the professor at the University of Leeds says she technically prefers PEC 45, as it unifies the five current taxes into just one tax, but points out that either of the two “is better than what you have now”. “There is no explanation for what you have now.”

Rich people also pay less income tax.

Part of the regressiveness of taxation on consumption is offset by income tax. As it is proportionally levied on taxpayers’ earnings, whoever earns more, pays more.

With one caveat: in Brazil, the effective rate (that is, the percentage of income that is actually taxed) grows as income increases, but only up to the range between 20 and 30 minimum wages. From then on, the richer, the lower the amount paid in income tax.

This was the conclusion of a recent study prepared by the Federal Revenue auditors union, Sindifisco Nacional, based on data from the 2021 tax return:

“Some mechanisms make the rich or super-rich pay less tax than the middle class and the poorest”, says Isac Falcão, president of Sindifisco Nacional.

A significant part of the distortion, he explains, is due to the fact that Brazil exempts from paying taxes on gains from profits and dividends — an important source of income for the richest.

This is the case of many entrepreneurs, for example, who do not receive a salary, but a share in the profits of their companies. Or those who invest in stocks — and who, under current legislation, do not need to pay taxes when they receive dividend distributions.

Brazil taxes the profit, but still in the company, before it reaches the shareholder’s pocket. This charge, however, is not equivalent when talking about tax justice and ability to pay, the idea of ​​”who can do more, pay more”.

Depending on the tax regime in which the company is located —Simples Nacional, real profit or presumed profit—, the effective rate may be significantly lower than the nominal rate, which is, in a simplified way, the percentage that is actually in the law. .

This is because companies can make a series of deductions and exclusions to reduce the amount that serves as the basis for calculating the tax. And they often use a series of legal benefits, a practice that has contributed to further increasing the distance between the so-called corporate profit, that determined by the company’s accounting, and tax profit, says Falcão.

For him, the exemption from taxation of profits and dividends, adopted in a few countries and in force in Brazil since 1996, helps to reverse the logic that should guide the taxation of income tax.

“Those who have greater economic capacity and, therefore, greater ability to pay, should pay more. In more developed countries, taxation is progressive, in Brazil, it is regressive.”

The taxation of profits and dividends was also defended by Lula during the campaign, as well as the increase in the limit for exemption from paying income tax from the current BRL 1,903.98 to BRL 5,000.00.

This text was originally published here.