TAXATION IN BRAZIL
ARGENTINA’S USE OF THE BANK TRANSACTION TAX (1984-1992) One often-heard criticism of bank transaction taxes has to do with its application
in Argentina in 1984. The allegation is that the use of a bank debit tax in Argentina was an absolute failure. It is claimed that such experience left a mark in popular imagination with stories about intense banking disintermediation, which have become folklore in the diatribe against cumulativeness.
The truth is that Argentina’s unsuccessful experience in the 1980s had nothing to do with banking disintermediation, but rather with misguided economic policies adopted during that period.178
Argentina’s bank debit tax went through several phases. Initially, it was a low-revenue provisional tax. But it became an important component of the fiscal adjustment performed in that economy until its extinction in July 1992. Minister Cavallo, who raised the tax’s rate to 1.2%, attributed to the tax a fundamentally important role in his economic stabilization policy. The bank transactions tax raised US$ 1.8 billion, or 1.27% of GDP. It exceeded all other taxes charged in Argentina, except for the value-added tax (US$ 7.2 billion) and the fuel tax (US$ 2.7 billion).
The bank transactions tax was extinguished exclusively because of its incompatibility with the traditional tax model that was later implemented in that country. In fact, the transaction tax does not fit in with traditional tax structures. As Robert Campos says, “use of the bank transaction tax would only be revolutionary if it were the only tax and not an additional one.” 179 In the 1980’s, the priority of the Argentine government was focused on implementing the value-added tax (VAT).
Argentina made rapid advances towards it, albeit with immense bureaucratic costs and a repressive atmosphere that bordered on fiscal fascism.180
Critics of the transaction tax claim that Argentina’s tax on bank debits was the cause of heavy bank disintermediation. The increase in its rates apparently motivated a significant fall in bank transactions and, consequently, increased cash transactions (in dollars or in local currency). It also allegedly motivated higher transaction costs and losses of competitiveness by banks and economic agents in general. Thus, the critics hold, eliminating that tax was an imposition of good sense, and Argentina’s experience would recommend against implementing it in Brazil.
Such a chain of events, however, is spurious for the reasons that follow.
Brazil possesses structural conditions that are more favorable to the use of transaction taxes than Argentina’s. Even in its initial phase, when the transactions tax
178 In 1993 a group made up of Deputies Roberto Campos, Luís Roberto Ponte, and Flávio Rocha, and the economists Daniel Dantas, Pedro Bodin, Luiz Zottman, and I, visited Argentina to meet with economists, bankers, business leaders, Minister Domingo Cavallo and with his federal revenue secretary. This group found out that the facts differ greatly from what is usually reported.
179 [CAMPOS, 1991]
180 See PEC nº 46/95, in discussion at the Chamber of Deputies.
rate was 0.1% or 0.2% and, therefore, no attempt was made to avoid the tax, the ratio bank transactions/GDP was around 2.5. In Brazil this ratio is much higher, approximately 4, according to CPMF revenue data.181 In other words, banks in Brazil are used much more intensively than in Argentina. In fact, checks were little used there. They still are not used by individuals or by commerce. The banking system was minimally computerized and there was no national clearinghouse, as there is in Brazil. Transaction costs are high and checks carry little credibility as a form of payment.
Furthermore, imperfect regulation of Argentina’s tax on bank debits allowed for the corrosion of its base of incidence. Only checks were taxed, while other types of bank payments were exempt, such as collection accounts (cuentas de recaudación), transfers among accounts, term deposits, and third-party checks. There were differentiated rates and a large number of exemptions and waivers. These deviations were gradually eliminated, but tax avoidance was heavy during most of the life of the tax, drawing bank transactions/GDP ratio down to about 1.2 in 1991.
It is worth mentioning that this drop was primarily due to factors other than those related to the tax itself. From 1988 through 1991, Argentina suffered enormous economic instability and two hyperinflationary surges. In this period, cash deposits yielded highly negative returns, especially since interest rates were fixed by the government, and caused savings deposits (not taxed) to migrate to informal and unregulated overnight markets.
These illegal markets were managed in ways similar to black-market lotteries, known in Brazil as “jogo do bicho”, which function on strict confidence. Individuals also converted their earnings into dollars, with up to 4% discount, a clear demonstration of the loss of competitiveness of bank savings accounts relative to those informal deposits. Under these circumstances, there is no way to rightfully attribute bank avoidance to the tax on bank debits.
TABLE 25
Tax on bank debits in Argentina
Rate (%) Period in force Revenue (*)
0.1 Jan. 84 to Jun. 85 37.30
0.2 Jul. 85 to Dec. 87 67.73
0.7 Jan. 88 to Dec. 89 121.74
0.3 Jan. 90 to Jan. 91 50.44
1.2 Feb. 91 to Feb. 92 167.59
0.3 Mar. 92 to Jul. 92 65.77
* Monthly average in 000,000 of pesos (Feb. 93).
Argentina’s experience teaches us a three-part lesson. First, a bank transactions
181 CINTRA, 1994(b)] pp.203-245.
tax requires competent regulation to work properly. Secondly, Brazil has the structural conditions that allow us to predict that a bank transactions tax can be a successful experiment, as indeed it has turned out to be. Thirdly, it is a streamlined tax with low costs (as acknowledged by Argentina’s bankers themselves) that did not cause a negative reaction among economic agents.182
182 A proof of the fact that the bank transactions tax in Argentina was not a failure, as critics suggest, is that a similar tax, with rates of 1% on bank debits and 1% on bank credits has been in us since 2001, and is nowadays the most important provincial tax in the country, with a rate of 1.2% levied on the value of each bank transaction.