“Evaluation of the Structure and Performance of the Brazilian Tax System
White Paper on Taxation in Brazil”
Discussion Paper: No. IDB-DP-265 August 2013
Published by the Inter-American Development Bank (IDB)
and written by:
José Roberto Rodrigues
Afonso Julia Morais Soares
Kleber Pacheco Castro
This White Paper is essential reading on the distinct policy dimensions of Brazilian Tax Policy and provides a critical assessment of the redistributive effects of current tax policies. This short review outlines the key points and propositions advanced by the IDB,
“The problems include complexity, the heavy burden for the tax administration, the latent cumulativeness, the indirect burden on exports and productive investments, and even tax competition between states to an extent not seen in other federations, referred to by Brazilians as a “fiscal war (2013:6).”
In short, Rodriques, Soares and Castro argue that the Brazilian tax system is inefficient and unjust, and thereby undermines both the economic development of the country and amplifies the income inequality that continues to plague Brazil in the twenty-first century.
“In 2010, the overall gross tax burden reached 34.19 percent of GDP—the fifth highest in the country's history, second only to the tax burden during the 2005–08 period. The tax burden totaled R$1,289 billion. In per capita terms, this level of taxation represented a burden of R$7,022.30 for every Brazilian. On average, every Brazilian resident had to work about 125 days a year (365 days) just to pay taxes (2013:12).”
It is an appropriate policy moment to discuss Brazil’s tax system, the historically high “take” coupled with the global and national economic slowdown raises the question of whether the current tax policies are sufficient, or worse, an obstacle to future economic growth and current social equity. As the White Paper and its authors point out, the Brazilian state collects a large proportion of the Gross Domestic Product (GDP) in taxes, now well above 30%, but has not yet achieved a satisfactory level of quality public services, at least comparable to those developed nations that “take” a third of the economy in taxes. The spat of protests in June illustrate the growing public concern over the relationships between income, taxation and public services. Moreover, the authors of the paper point to the glaring weight of the levy of the ICMS, Brazil’s tax on merchandise, services and goods which amounted to 45% of all taxes collected and represented some 15.4% of the GDP in 2010 (2013:22). The ICMS is an indirect tax levied on common purchases of wage goods and services, and is therefore highly regressive especially in the context of high-income inequality. More than any other aspect of Brazil’s complex tax code, the ICMS contributes the most to the inefficiency and income concentrating effects.
With respect to Payroll Taxes, the paper criticizes the high levels of employer contributions to the overall weight of these deductions and transfers and suggests that reforming these taxes to reduce employer contributions could lead to great job creation and efficiency, thereby triggering greater productive investment. While such outcomes might be expected given significant reductions for employers, there may be alternative fiscal and regulatory policies that could also achieve such ends. While Payroll tax reforms might be warranted, they certainly are not priority at this time.
However, income and capital gains taxation in Brazil remain relatively low due to the over-reliance on the ICMS as the major source of government revenue in recent decades. In 2010 income and capital gains taxation represented 18.6% of all taxes collected and some 6.4% of GDP. In comparison with the ICMS, as well as the structure of taxation of more developed nations, Brazil’s income and capital gains taxation is too low, but cannot be reformed without a concurrent reform of the ICMS, namely the latter’s reduction as a source of government revenue.
The white paper treats other critical issues in Brazilian taxation, including inter-governmental transfers, but the core critique of this publication points to the growing need to integrate tax policy into a broader policy framework designed to advance equitable economic development. Indeed, the authors spell out a short list of policy reform areas for consideration, including:
1) Alleviating the fiscal war created by the ICMS and inter-governmental transfers;
2) Fixing the tax credit problem that undermines the country’s export led development dynamic;
3) Reducing “cumulative taxes” that distort the efficient allocation of productive resources;
4) The overall need to achieve greater tax equity and justice by lessening regressive taxation, namely the ICMS.
Overall, the IDB and the authors offer a compelling, well-researched policy framework for advancing greater research of Brazilian taxation and guiding policy discussion in an era of growing public and political concern over the gap between taxation and public services in Brazil. The paper offers thoughtful policy analysis that identifies the need for reform and the opportunity to transform taxation to achieve multiple ends; government revenues, increased firm competitiveness and productive investment, and increased social equity. While the private sector has always clamored about the need to reduce payroll and capital gains taxation, it is now time for civil society to understand taxation as a policy area that transcends the state’s “take” to finance public services. Rather, and as the authors suggest, citizens and civil society need to advance a tax reform agenda that is compatible with Brazil’s need to grow through more equitable public policies.
Read the entire IDB White Paper here: