COST EFFECTIVENESS

The impact of the Single Tax on Bank Transactions model has triggered a nationwide movement to reform Brazil’s tax structure. Those who favor a paper-free tax system embrace the Single Tax proposal, whereas defenders of paper-driven taxes discredit it, stressing its undesirable cumulativeness.

The single tax has countless advantages as a taxation system. Auditing becomes simpler; taxation criteria are more transparent; bureaucratic and compliance costs both to the public and to the private sectors are lessened. The simplification of the fiscal process becomes evident when all revenue is concentrated in a single tax, levied on a single tax base. Public administration costs decrease.

Only recently have economists and public officials begun to estimate auditing and other administrative costs related to tax collection in Brazil. The results of such studies are leading to important conclusions about the advantages and disadvantages of alternative tax models.

In the United States, federal tax collection costs equal 0.5% of revenue. For personal income tax, the compliance costs for individual taxpayers represent from 5

28 The underlying cause of the hyper development of the banking system and of the generalized rejection of paper currency as a means of payment in Brazil is the result of the hyperinflation spiral that took place during nearly 40 years. Under those circumstances, non-indexed paper currency was abandoned by economic agents. Furthermore, banking activity, stimulated by ‘float’ that resulted from high inflation, increased its profitability in direct proportion to the speed with which bank deposits could be captured and quickly transferred to be invested in the open market. This led to the use of advanced electronic technology and to the hyper development of banking activity in Brazil.

to 7% of the revenue raised by the federal and state income tax systems combined.²⁹ Administrative tax costs in the United States are estimated at 1.13% of revenue.

Compliance costs related to sales tax are estimated to be 3.93% of revenue.³⁰ In 1986, the cost of fiscal administration in France was 3 to 4% of revenue, or 1.5% of GDP, not including private compliance costs.³¹ Data from research conducted in other countries and reported at the International Fiscal Association Conference in Rio de Janeiro in 1988 are reproduced in TABLE 1.

TABLE 1

Tax compliance and administrative costs, as a percentage of GDP

Country Compliance costs Administrative costs Operational tax costs

Germany 2.40% 0.60% 3.00%

Argentina 1.30% No data No data

Canada No data 0.40% No data

France No data 1.50% No data

Israel 1.10% 0.50% 1.60%

Netherlands 1.50% No data No data

Portugal No data 0.70% No data

United Kingdom 1.00% 0.50% 1.50%

Sweden 0.70% 0.30% 1.00%

Switzerland No data 0.70% No data

Australia 2.10% 0.20% 2.30%

New Zealand 2.50% 0.50% 3.00%

Brazil (total) 0.80% 0.20% 1.00%

Brazil (firms with gross income

up to R$ 100,000,000) 5.80% 1.50% 7.30%

Brazil (firms with gross income

From R$ 100 to 1,000,000,000) 1.90% 0.50% 2.40%

Brazil (firms with gross income

From R$ 1 to 5,000,000,000) 1.30% 0.30% 1.60%

Brazil (firms with gross income

From R$ 1 to 5,000,000,000) 0.20% 0.05% 0.25%

Source: [BERTOLUCCI, 2001] p.163.

In Brazil, tax administration costs to the government are probably much higher, not only because of the inefficiency of the tax collection apparatus, but also because of the multiplicity of fiscal obligations to which individuals and corporations are

29 [SLEMROD and SORUM, 1984]. [TANZI, 2006], p. 14, referring to a study made by Edwards C., of the Cato Institute in Washington mentions that in the US the federal income tax legislation had 400 pages in 1913, when it was first introduced, 8200 pages of rules in 1945, 26300 pages in 1984, and 66498 pages in 2006.

30 According to [THE ECONOMIST, 2005(a)], p.25, tax legislation in the US is over 60.000 pages long, and annual tax compliance costs amount to US$ 115 billion.; see also [THE ECONOMIST, 2005(b)], pp.59-61, and [THE ECONOMIST, 2004(b)].

31 For estimates of compliance costs in the world see [GALLAGHER, 2004], p.9.

subjected. Add to these the costs of tax reporting to which private agents are subjected in Brazil, and it is no exaggeration to state that total costs can be as high as 20% of tax revenue. This is unproductive effort, which translates solely into expenditures, without in any way contributing to increases in production or social well-being.

It is worthwhile noting the statements made by former Secretary of Federal Revenue, Everardo Maciel, while testifying before the Comissão Parlamentar de Inquérito [Parliamentary Inquiry Committee] (CPI) on May 8, 2002. The Secretary’s sympathy for the CPMF (a bank transactions tax used in Brazil since 1996 and which would be the hegemonic tax in the single tax model) is noteworthy. He said, “my presence here is solely to quickly state for the record that the bank debit transaction tax (CPMF) has been an extremely valuable instrument from a revenue collection standpoint, precisely because it manages to produce public revenue at low cost, with extreme efficiency, and, additionally, serves primarily as an auxiliary instrument for tax auditing.”

Nevertheless, when asked about the Single Tax model, Secretary Maciel stated,

“Even if I were totally favorable that the CPMF be converted into a permanent tax, I recognize nonetheless that if we go to the trough too eagerly, that is, if its tax rates increases, we could begin to induce ever more sophisticated, ever more elaborate tax evasion procedures. My experience tells me that anytime the rate increases, anytime fiscal pressure turns heavy, taxpayers will seek ways to free themselves of it, and usually through tax evasion. The second point, and Deputy Marcos Cintra knows this, I do not believe that the Single Tax is the best solution for the tax system. We have a large cast of alternatives and options. Rest assured, your Excellencies that every time we build a tax system around a single point, taxpayers will try to run away from that point; they will try to find a way to dodge it. So, we must always have somewhere else to go; if we do not reach it through this avenue, we will reach it through another. And that has been the history of taxes throughout the world; this is how tax theories developed. But I think that, today, the bank debit transaction tax (CPMF) occupies a place of capital importance, a place of distinction in tax theory, especially for taxation in countries that have weak tax collection traditions, as is the case in Brazil.”

Though Secretary Everardo Maciel argues for the permanence of a bank transactions tax, the fear of possible evasion blocks him from fully supporting the Single Tax. Ironically, the bank transaction tax has been showing strong evidence to be capable of minimizing, if not eliminating, tax avoidance in Brazil.

It is also worth noting an opinion that claims that criticisms of the Single Tax are born of “...small and easily correctible details which are enumerated in order to bombard the most brilliant idea, I dare say, that has ever arisen on tax matters in modern times, in the era of financial capitalism, not by the fact that it is single, but primarily because of the characteristics of the tax, which is practically impervious to

evasion. Therein resides the fear of its creation.”³²