Lula must have support in Congress for tax reform, but resistance to labor change

The third term of president-elect Luiz Inácio Lula da Silva (PT) should find a favorable environment for tax reform in Congress, with the willingness of center and center-right parties to join the governing base in approving the changes, even if with some shedding potential.

The same cannot be said about changes, even if occasional, in the labor legislation approved during the government of Michel Temer (MDB), in 2017.

In his election campaign, Lula promised simplification of taxes so that “the poor pay less and the rich pay more”, a reduction in taxation on consumption and a new labor legislation with extensive social protection for all forms of occupation —with special attention to self-employed and application workers.

The PT considers that the tax has to be one of the first flags of the government elected in Congress, even to soften the impact of the PEC (proposed amendment to the Constitution) that removes R$ 145 billion from the spending ceiling and authorizes R$ 23 billion in off-limit investments, in addition to other measures.

Within the tax field, the discussion regarding consumption is seen as more mature after Congress has addressed two PECs that simplify taxation in the country. 45, authored by Deputy Baleia Rossi (MDB-SP), provides for the replacement of five taxes (IPI, PIS, Cofins, the state ICMS and the municipal ISS) by the idea of ​​the tax on goods and services (IBS).

110, from the Senate, transforms nine taxes (IPI, IOF, PIS, Pasep, Cofins, Cide-Fuels, Salary-Education, ICMS and ISS) into an IBS.

Despite both being considered good texts by the PT’s team, PEC 45 should be prioritized by the new government, especially after the future Minister of Finance, Fernando Haddad, appointed economist Bernard Appy to the position of special secretary for tax reform starting from de 2023. Appy acted as a mentor for Baleia Rossi’s text.

The expectation of Lula’s economic team is that the single rate will face resistance in Congress, and the PEC will be dehydrated. Members of the folder, however, see alternatives and promise to include the Federal Revenue in the dialogue in search of a way out.

For Débora Freire, economics professor at Cedeplar at UFMG (Regional Development and Planning Center of the Federal University of Minas Gerais), the text of the PEC must face sectoral resistance, which may put pressure for differentiated treatment or for the exclusion of some tax in the composition of the single rate.

“In the long term, this ends up harming the potential of the reform to harmonize the tax system and have a great capacity to foster economic growth”, he says.

The economist points out that the effect of the tax reform is maximized when it is possible to harmonize the rates, with the elimination of the tax cascade effect. According to her, the industry would be among the main sectors benefited by the change.

A co-authored study by a UFMG professor calculates that the reform of consumer taxation, as provided for in the text of PEC 45, would have the capacity to reduce the Gini Index by around 2% – an instrument to measure the degree of income concentration in a given group .

Freire points out that this potential impact rises to 3.2% when a mechanism for refunding taxes on the basic food basket for low-income families registered in the CadÚnico (Federal Government Single Registry) is coupled.

For the National Sindifisco, today there is an excessive participation of taxation on consumption in the total of Brazilian taxation, which contributes to the regressivity of the model – that is, it collects proportionally more from those who earn less.

Although he sees the potential reduction in the costs of implementing tax legislation by companies as positive, President Isac Falcão claims that the proposal “does not attack the central problem of Brazilian taxation, which is inequality” and argues that the reform of taxation on income be a priority.

During the campaign, the president-elect promised to increase the Income Tax-exempt salary range to up to R$5,000. After Lula’s victory, Lira signaled that she would vote for a text by Deputy Danilo Forte (União-CE) that extends the IR exemption for those who earn up to R$ 5,200. The PT, however, arranged for the project to be discussed only in 2023.

The taxation of dividends, in turn, would have support from the PT and center and center-right parties. The Chamber even approved, in September 2021, an Income Tax project that taxed profits and dividends at 15%, but the text stopped in the Senate — Lira publicly defended on some occasions the taxation of dividends.

In Congress, one wing defends the creation of a tax on digital transactions. The proposal was even embraced by Minister Paulo Guedes, but it was never taken off the ground by the resistance created when compared to the extinct CPMF (Provisional Contribution on Financial Transactions).

When it comes to labor changes, convergence gives way to divergence. At the beginning of the campaign, Lula signaled that he was considering revoking the labor reform. Throughout the campaign, he modulated the speech and started talking about revising.

The PT criticizes some points of the change approved by the Temer government, such as the intermittent working day. But he assesses that there is no support for changing them — centrão and center-right parties have already sent messages that they will not accept what they see as “setbacks”.

Ricardo Patah, president of UGT (General Union of Workers), defends the renegotiation of some items. In the case of intermittent work, the union central wants some established rules — such as a minimum number of hours per week, for example.

The elected government also has one of its goals to regulate work by application. For Patah, the formalization of these collaborators is not a peaceful issue. “This dispute will be a long one and, while it is not resolved, we have a series of adversities in limbo for platform workers. Our idea is to create some security for the worker”, she defends.

During the transition, the technical group that dealt with work and social security defended the strengthening of union action and the debate on a new source of financing — without recreating the union tax.

Patah proposes that workers decide in an assembly whether or not they want to contribute. With the reform, the mandatory contribution, one of the main sources of income for the unions, was replaced by a payment that depends on the worker’s authorization.

The group that discussed the area of ​​work also proposed that the elected government prevent any attempt to create a green and yellow card regime, a program that makes labor legislation more flexible, defended by Guedes and which was barred by Congress twice.

There is also discussion about the resumption of the employer’s obligation to approve the worker’s contractual termination before the union.

Economist and researcher at Cesit (Center for Union Studies and Labor Economics) at Unicamp, Marilane Oliveira Teixeira, sees the possibility of individual negotiation prevailing over collective negotiation as one of the “most nefarious” aspects introduced by the reform.

She still recalls that intermittent work was the main showcase of the labor reform, with the promise of generating millions of jobs. But she points out that what was seen in practice, after five years, was not that. “It represents less than 0.5% of formal ties in the labor market”, she says.

For the specialist, the only positive aspect of the reform was the end of the union tax. “It forced unions to rethink how they support themselves.”

Proposals of the Lula/Alckmin government program

• Solidarity, fair and sustainable tax reform
• Simplify and reduce consumption taxation
• Ensuring tax progressivity (wealthy people will pay more)
• Discharge product with higher added value, embedded technology and ecologically sustainable
• Combating tax evasion

Source: Guidelines for Brazil’s reconstruction and transformation program – Lula/Alckmin 2023-2026

More advanced proposals in Congress

1) PEC 45 – report by Deputy Aguinaldo Ribeiro

• Replaces five taxes (PIS, Cofins, IPI, ICMS and ISS) with a Tax on Goods and Services and a Selective Tax on cigarettes and alcoholic beverages
• Six-year transition in two phases, one federal and the other with ICMS and ISS
• Replaces the exemption of the basic food basket with the refund of taxes for lower-income families

2) PEC 110 – Senator Roberto Rocha report

• Creation of CBS (Contribution on Goods and Services) with merger of PIS and Cofins
• Creation of the IBS (Tax on Goods and Services), with the merger of ICMS and ISS
• Replaces IPI with a selective tax on items harmful to health and the environment
• Creation of the Regional Development Fund, supplied with IBS resources
• Tax refunds for low-income families

3) PL 3887/2020 – proposal from the Ministry of Economy

• Creation of CBS (Contribution on Goods and Services) with merger of PIS and Cofins
• Current rule for exemption from the basic food basket maintained

4) PL 2337/2021 – text approved by the Chamber

• IRPF exemption in the range up to R$ 2,500 and average correction of 13% in the other ranges
• Maximum simplified discount of BRL 10,563.60 (today, the limit is BRL 16,754.34)
• Taxation of dividends, with exemption for Simple and presumed profit
• Cut the IRPJ base rate from 15% to 8%
• CSLL cut by up to 1 percentage point
• End of JCP (Interest on Equity)

Sources: Chamber of Deputies and Federal Senate

Group of Six proposal (Bernard Appy and others)

1) Taxation of consumption: pursuant to PECs 45 and 110, pending in Congress

• Replacement of five taxes (PIS, Cofins, IPI, ICMS and ISS) by a value added tax (VAT), with centralized collection and shared management (PEC 45)
• Possibility of having a federal VAT and others for states and municipalities (PEC 110)
• Replacing the basic food basket exemption with tax refunds for lower-income families

2) Taxation of labor income

• Update of the IRPF table plus annual correction for inflation
• Additional rate for higher rents
• Limitation of tax benefits
• Reduction of the employer’s contribution in the portion of remuneration above the INSS ceiling

3) Capital taxation

• Reduction of the tax rate on corporate profits and change in the calculation base
• Taxation of dividends and other income through a progressive table

4) Taxation of financial investments

• Eliminates exemption for some applications (LCI, LCA, CRI, CRA and real estate fund)

5) Simplified regimes (Presumed and Simple Profit)

• Reformulation to correct distortions that hinder the growth of small companies, discourage “pejotization” and low taxation of high income
• Small Simples should pay less tax; high-end PCs, more

6) Taxes on equity

• Complementary law on inheritances and donations abroad
• IPVA for vessels and aircraft
• Review of the ITR (rural land tax)

Source: Contributions to a Democratic and Progressive Government (August/2022)