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Reform reduces taxation on consumption for the poorest and raises it for the richest, study shows


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A study by the CLP (Public Leadership Center) shows that the proposals for consumer tax reform under discussion in Congress reduce the burden for 96% of Brazilians and raise the income of all consumers, especially the poorest.

The reform would reduce the tax burden on consumption from 35% to 31.5% among people at the bottom of the income distribution. Among the richest 2% of the population, it rises from 31.6% to 32.2%. That is, taxation becomes more equitable among all income brackets.

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Based on studies that estimate a potential gain of around 20% for the Brazilian economy, the CLP calculated the impact on each group’s income. There would be a gain that starts at around 14% for the poorest and reaches almost 10% among the richest. In other words, everyone wins. Some more, some less.

Researcher Daniel Duque, responsible for the work, divided the population according to income by fifty, that is, 50 plots, each one representing 2% of Brazilians.

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With these gains, according to him, it is possible to put 6 million Brazilians above the poverty line, in addition to lifting 2 million people out of extreme poverty. There is also a reduction in the Gini index from 0.553 to 0.548 —the lower the indicator, the lower the inequality.

The work also points out that sectors that are currently less burdened, such as services, construction and agriculture, will be more taxed, but will still continue with a lower burden than industry.

The Lula government intends to approve two tax reforms this year, one that deals with taxes and contributions on consumption, in the first semester, and another that modifies the taxation of income and assets, in a second phase.

Researcher Daniel Duque, responsible for the CLP’s work, says that the proposal to unify taxes on consumption mainly generates gains in productivity and income, raising the country’s growth potential and reducing poverty. As a secondary effect, it produces some reduction in inequalities.

Changes in income and property taxes, on the other hand, making them more progressive, have a much smaller impact on productivity and income, but a much greater impact on distribution, which makes the two proposals complementary.

Currently, consumption taxes are more burdensome for the poor. This population has a greater share of income committed to goods, which have a higher tax burden, than to services, which are less taxed items. With the reform, taxation becomes homogeneous, without differentiating goods and services.

The study used as a basis the two main proposals that are being processed in Congress (PEC 45 and PEC 110). They propose the unification of five taxes: the federal IPI, PIS and Cofins, the state ICMS and the municipal ISS, with a uniform rate for all goods and services. There is also the idea of ​​having a federal tribute and another state-municipal one.

In all cases, the current level of collection would be maintained and the taxes would be non-cumulative: the tax paid on the acquisition of the input is deducted from the final value of the product.

Among the objectives of the reform are reducing the complexity of the system, the multiplicity of laws and sectoral distortions, in addition to putting an end to the tax war (with the end of many tax incentives) and exempting investments and exports.

In relation to sectors, the CLP calculates that the taxation of the manufacturing industry drops from 46% to 35% with the reform. That of services —the sector most resistant to reform— rose from 22% to 31%. In construction, from 15% to 27%. In agriculture, from 2% to 5%.

Even with a single rate, there are a number of issues, including informality, that make the effective tax burdens of the sectors different.

Duque claims that none of them will surpass the other in terms of higher taxation. The scale that starts with the industrial sectors of public utilities (such as water and energy) and manufacturing at the top is maintained; services and the extractive industry as intermediaries; and construction and agriculture at the base.

“We have a consumption profile, all over the world, in which the higher your income, the more you consume [proporcionalmente] services and less food and primary and industrial goods. But taxation in Brazil favors the service sector to the detriment of industry. An approximation of the burden of these two sectors leads to greater consumption gains of the poorest population”, says the researcher.

Duque did not consider in his work the mechanism for returning taxes to the poorest to compensate for the end of the exemption from the basic food basket. It is foreseen in the two proposals of initiative of the Congress, but it will be regulated later. A similar system is in operation today in Rio Grande do Sul.

A study by Ipea (Institute for Applied Economic Research) in 2020, by researchers Rodrigo Orair and Sérgio Gobetti, estimated a positive impact for 90% of the population and a negative impact for the richest 10% with the proposal of equal rates for all products and services.

A 2021 work by the Pra Ser Justo movement, together with researchers from UFMG (Federal University of Minas Gerais), estimated that a tax refund system for poorer people can benefit more than a third of the population with a budget lower than that of the exemption from the basic basket.

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