RATES, REVENUE, AND EVASION

The Single Tax has countless advantages, such as enormous simplification and reduction of tax collection costs. This latter advantage is not restricted to a reduction in the size of the governmental apparatus, but also includes lower compliance costs to businesses, that currently use about 10% of their administrative staff to meet the requirements of tax reporting. Altogether, such costs now amount to as much as 20%

of the country’s gross tax revenue, which presently amounts to 37% of GDP. This means that the impact of the Single Tax proposal in terms of releasing real resources to be put to other uses would be on the order of 7.4% of GDP. This amount is more than double the net capital earnings transfers to foreign income recipients – payments of interest, profits, and dividends. These are resources that could be channeled to productive investments and would be capable of leveraging economic growth, instead of being absorbed in government consumption activities and private administrative costs.

The Single Tax, if we take the experience of the bank debit transaction tax (CPMF) as an example, could lead to the virtual elimination of tax evasion and fiscal corruption, and to a reduction of the underground economy, at practically no cost to the public sector. Tax collection would take place automatically upon each debit or credit transaction within the banking system. Each credit and each debit account would be charged a fixed percentage of the value of the transaction. Thus, every time a check or other payment method is cleared, the system would automatically transfer the proceeds of the tax to the federal, state, and municipal treasuries, pursuant to predefined criteria. To make tax evasion practically disappear it would suffice to monitor the bank clearing systems.

Practical administrative and operational aspects of taxation are usually ignored, or simply assumed away as non-existent, by economists. Only recently have economists turned their attention to such issues. Public policy towards evasion reflects complex issues involving efficiency, equity and growing compliance and administrative costs, and generally need much more attention from economists than has happened in the past. “Tax evasion clearly complicates measures of the distortionary effect of taxation; given a fixed revenue requirement, evasion means that higher and more distortionary taxes on reported income may be needed, while unreported income largely escapes taxation and its distortionary effects”⁷¹

71 [ANDREONI et alii, 1998] p.818.

Skinner and Slemrod say that “the cost of tax evasion include violations of horizontal equity, vertical equity, and efficiency…Increased enforcement will generate more revenue, but often at a substantial resource cost….The advantage of tax simplification is that it will generally reduce the loopholes that are breeding grounds for tax evasion schemes. Finally, reduced marginal tax rates have been associated with a significant decline in tax evasion.”⁷² Thus, the Single tax proposal stands on a superior level relative to conventional declaratory taxes such as the VATs, which are notoriously prone to corruption, high operational costs and growing complexity.

The most significant element of the Single Tax proposal is that, being evasion proof, the tax rate could be low. Using the statutory regulations that apply to the bank debit transaction tax (CPMF), the Single Tax revenue can be estimated by simple linear projection. Despite all existing constitutional immunities and even in the absence of adequate government auditing of bank payment systems,⁷³ revenue from the CPMF was significant and indicates that a 3% rate on each side of each transaction is capable of generating around 40% of GNP in revenue. This amount is larger than the combined tax revenue from all federal, state, municipal, and social security taxes and contributions.

However, the initial Single Tax revenue forecasts assumed a universal tax base, which is significantly broader than the present tax base of the CPMF.⁷⁴ Furthermore, precarious auditing of banking institutions is responsible for a significant part of the difference between the revenue estimates done in early studies of the Single Tax and actual revenue collected through the present system. The data available at the time of the first revenue estimates were done in the early nineties implied that, with a 1%

rate, annual revenue from the Single Tax would be between US$ 69 billion and US$

72 [SKINNER AND SLEMROD, 1985], pp-345-353.

73 Former Secretary of Federal Revenue, Everardo Maciel, responding to a question presented by the author in a seminar that took place at the Federation of Brazilian Industries, in Brasília, on August 7, 2001, discussed the precariousness of the auditing system for the CPMF. Such deficiencies were made evident in various newspaper articles printed during April 2002, according to which the Central Bank uncovered the existence of mechanisms, which banks offered to their largest clients that avoided collection of the CPMF. Such schemes resulted in heavy fines imposed by the federal revenue service against banks and their clients. The frauds became possible through the use of exemptions in colleting the CPMF allowed for flows of payments involving reserves among bank’s own checking accounts (or belonging to their respective financial agencies), in association with the permission to endorse checks. See Carta Capital, May 15, 2002, Valor Econômico Apr.24, 2002 and May 09, 2002. The Federal Single Tax bill under discussion in National Congress includes simple provisions that practically make such frauds all but impossible.

74 [CINTRA, 1994(b)], pp.235-239, where the author analyzes and compares various revenue estimates for the Single Tax: a first estimate based on data from a sampling of eight commercial banks, gathered by Febraban, the Brazilian Federation of Banks; a second estimate, made by the author based on data obtained directly from the accounting records of a large commercial Brazilian bank; a third one, made by the MCM Consultores, a consulting firm, and a fourth estimate carried out by KPMG, Peat Marwick Consultants.

89 billion.⁷⁵ At the then current exchange rate, these revenue levels accounted for between 19.6 and 25.3% of GDP. TABLE 4 reproduces the main results obtained by different research groups in their projections.

During the period immediately following the announcement of the Single Tax proposal, and following the publication of a study which contained the initial revenue estimates, a large banking institution began to provide the author with monthly volumes of debit and credit transactions related to its clients’ checking accounts. That banking institution’s accounting was the basis for transactions estimates, and made possible to obtain data equivalent to a significant sample of Brazil’s total banking system. These data were reported to the author monthly between June 1990 and May 1996. The reported values at December 2000 prices can be found in ANNEX I-B.

TABLE 4

Transaction volume and Single Tax revenue estimates (R$ 000,000,000/year)

Type of transaction KPMG MCM Author (Febraban)

Checks 7,200.0 5,932.8 10,368.0

Cash 2,558.4 2,275.2 2,592.0

Financial transactions 3,600.0 4,003.2 5,068.8*

Other 2,5940 4,519.2 5,011.2

Total value of transactions 15,952.8 16,732.8 23,040.0

Projected revenue 177.6 165.6 213.6

Revenue/GDP (%) 21.0 19.6 25.3

Total value of

transactions/GDP 18,9 19,8 27,2

Source: [CINTRA, 1994(b)], pp.235-239.

*Values may be inflated due to overnight operations.

TABLE 5 shows the annual banking transaction data for that institution and, based on the estimates of its share of the national banking system, it was possible to estimate projected revenue of the Single Tax, at rates of 1% for debit and 1% for credit bank transactions.

The conclusion to be drawn from these projections is that, considering the low marginal rate for the Single Tax needed to replace current tax revenue, the incentive for tax evasion would virtually disappear. Tax evasion would become impossible except in cash or barter transactions. In these two cases the cost of evading taxes (transaction costs) would most likely exceed the benefit from tax evasion, thus

75 These estimates adopted operational procedures proposed in the Single Tax bill, that is, 1-) tax overcharges on withdrawals and deposits, 2-) immunity on operations in the financial and capital markets, 3-) non-declaratory taxation of 25% on real returns of financial investments, and 4-) elimination of present constitutional tax immunities.

removing the stimulus for attempting to circumvent the tax system. Furthermore, the regulations for the Single Tax should provide that transactions above a certain value must be processed through the banking system, under penalty of legal nullification if processed otherwise.

TABLE 5

Transaction volume and revenue estimates for the Single Tax Source of data: a financial institution’s monthly accounting

(R$ 000,000/year) (Dec/2000)

Year GDP Credit transactions Debit transactions

1990 836,518.56 12,932,577.95 12,938,219.66

It is important to remember that under the Single Tax model any withdrawal or deposit of cash into or from the banking system would be charged an overtax at a rate that is equivalent to the revenue raised considering the number and value of transactions carried out with that cash amount until its return to the banking system.

This operational procedure would deter the use of cash transactions as a means of tax evasion.

Such a taxation system would eliminate (or compensate for) tax evasion – the value of which is presently estimated to be between 30 and 40% of public revenue.

There would be a noticeable reduction of production costs and prices, a fall in the costs of the public apparatus, and, potentially, a significant reduction in the tax burden. Certainly some of these gains would be once and for all, but would be sufficient to allow a significant fiscal adjustment and a noticeable recovery of the country’s investment capacity.

STRENGTHENING THE REVENUE-RAISING FUNCTION OF TAXES