TAXATION IN BRAZIL
SETTING RATES FOR BANK TRANSACTION TAXES
Although the productivity of Brazil’s CPMF has remained robust and stable as its rate grew from its initial level of 0.20% to its final level of 0.38%, its adversaries insist on saying that it has reached its maximum tolerable level, warning that any increase will inevitably lead to stronger tax avoidance and evasion (even if difficult), and that, therefore, its base would shrink significantly.161
The above-mentioned paper written by the Federal Revenue admits that, “the Laffer curve effect exists not only for the CPMF, but for any tax: it is natural to expect that, for each percentage point of increase in the tax rate, marginal tax revenue will fall. Therein lies the art of fine tuning in tax policy, and from what we can see, the Brazilian experience has been successful…”
Actually, the rate capable of maximizing CPMF revenue is still far above 0.38%. This fact, if proven, would imply a significant support for the idea of imposing a tax such as the Single Tax on bank transactions.
Determining the point beyond which a rate increase would cause declining (or even negative) marginal revenue depends critically on the advantages and benefits that the modern banking system offers its clients. The only way to avoid tax incidence on bank transactions would be to cease using banks for clearing financial transactions. In other words, the incidence base of the CPMF will only suffer a decline if people stop using the banking system to make payments, and begin to
161 Concerning the rate and the potential revenue of the Single Tax, see [CINTRA, 1994(i)]. In this paper, the author points to the strong revenue potential of a bank transactions tax if it is used as a single tax as opposed to its use as one tax among others; he also shows the operational differences between the IPMF (and more recently, the CPMF) and the Single Tax, with emphasis on the effect of the constitutional immunities given by these taxes, and the issue of a drop in revenue due to the
“whistleblower effect”. By using the bank transaction tax as a control mechanism for the compliance of other taxes, the tax evader is led to also defraud the tax on transactions, even when the implicit costs of evasion are higher than the tax savings obtained.
replace bank fiduciary currency for outmoded paper currency. This would mean a remonetization of the economy.
The occurrence of this phenomenon will depend critically on the cost-benefit relationship between the tax savings derived from using paper currency (which is the same as the tax’s nominal rate) and the added transactional cost of doing away with bank services.
It is easy to verify that in integrated and globalized societies, remonetization of the economy is only a theoretical possibility. It would be inconceivable that in contemporary economies, where purchases and sales are made globally and with ever-increasing frequency, electronically, there would be even a remote possibility of receding to a system of person-to-person payments in paper currency. The costs would be astronomical and would mean the virtual destruction of the modern economy.
Likewise, how can anyone imagine that payments for all purchases and sales made in all the markets of the world could ever be made in cash? Would it make financial sense to anyone to make payments to suppliers and services at the cashier’s windows of the various commercial establishments, just to save a CPMF of 0.38%
charged on the transaction? What would be the additional transaction cost of choosing to pay in cash?
Security, physical displacement, transportation, opportunity cost for time spent in manual payment, and many other reasons would imply a significantly higher marginal transactions cost compared to the tax saving. Such a choice would mean the rejection of all present-day progress and a return to economic pre-history. Therefore, it is difficult to imagine that this scenario would occur because of a reasonable CPMF rate increase.
But there still remains the matter of knowing what the tolerable rate ceiling would be for a bank transaction tax.
The theoretical answer would dictate that the ceiling rate would be the difference between the transactional cost of using paper currency and the corresponding costs of making payments through the banking system. That is, the rate would have to be equal to or greater than the maximum amount bank clients would be willing to pay in order to reduce the transactional costs if they use the banking system to make payments. As a mere theoretical exercise, one could assert that in a perfectly competitive economy, in which the price of a service equals its marginal benefit, the ceiling for the CPMF rate would be equal to the banking system’s participation in National Income.
In Brazil, during the inflationary period, the banking system reached 13% of GDP. More recently, it has decreased to about 6% of GDP. Thus, one can say that the rate at which the CPMF’s marginal revenue becomes zero, and then negative, is
around 6%.162
As evidence that the current CPMF rate is far removed from critical values for maintaining its current level of productivity, two important facts should be stressed.
First, is the growing importance of digital money and of electronic payments.
According to an article published in Information Week “in the United States, e-mail payment systems now send money not only to friends and family, but also to online merchants, purchasers, and sellers, in a global environment.” In this system, clients send e-mails, as if they were checks from their electronic checkbooks.163 Most surprising, is the cost of these services. As can be verified on the website of one of these companies, PayPal (http://www.paypal.com), the service is free for remitters. For recipients, there is a fixed fee of 30 cents, plus 2.2% of the amount received. In the case of corporate market payments, the cost can be as high as 2.9%
of the transaction amount. In some cases, the cost can be as much as 3.5%.164 Even with current fees “PayPal adds 50,000 new users to its customer base, every two days”. This is unequivocal evidence of the high value customers place on computerized banking services in the modern economies. It also shows convincingly the wide space for increasing CPMF rates and its enormous potential to become the basis of a tax model in the framework of the Single Tax.
Further evidence of the same phenomenon can be found in Brazil’s banking system. Fees charged by banks provide an assessment of the marginal utility of the services they supply.
A paper by ANEFAC (Associação Nacional dos Executivos de Finanças, Administração e Contabilidade [National Association of Finance, Management, and Accounting Executives] evaluates banking service costs in Brazil between March and May 2000. They are several times higher than the CPMF, in terms of an equivalent tax on bank transactions. TABLE 22 demonstrates that, in the case of corporations, banking services can cost as much as 1.43% of monthly invoiced sales.
Because this concept can be considered equivalent to bank transactions (we are assuming that the velocity of bank circulation of corporate invoiced sales is equal to one; that is, corporation’s invoiced sales are deposited and withdrawn from the banking system only once), it is clear that no bank flight occurs, even if bank
162 It is worth repeating that this is a theoretical analysis which requires, to be supported, strong assumptions about the competitive conditions under which modern economies function. In this regard, the Federal Revenue Service quotes, as a warning, economics Nobel prize-winner George Stiglitz, who says: “there is the assumption implicit in our earlier discussion that a competitive equilibrium is attained...this may be problematical, and much of macroeconomic policy is directed at disequilibrium in factor markets, in the balance of payments etc.”.
163 Many companies are dedicating time and effort to this fast expanding field in the USA; it is a market niche for which major US banks are hotly competing. Citibank is developing a new product in this market, through its partnerships with MSN and AOL, and Bank of America plans to offer a similar system by email, based on WebPay, by CheckFree.
164 [THE ECONOMIST, 2004(a)]
transactions are charged up to 1.43% merely to cover bank service fees.
For individuals, the evidence is equally convincing. TABLE 23 shows the equivalent monthly income needed to bring customer banking fees into equivalence with the CPMF, charged at 0.38%. As can be seen, the lower limit for monthly income must be R$ 17,116.00 and the upper limit, R$ 40,706.00. Because these income levels are higher than the 97th percentile of income distribution in Brazil, it is evident that wide space exists for raising CPMF rates before these would result in declining marginal revenue.
TABLE 22
Cost of banking services in Brazil, as a percentage of companies’ gross revenues Corporations – monthly gross revenues
(R$) Banks
100,000 500,000 1,000,000 5,000,000
Public 0.91% 0.46% 0.33% 0.16%
Foreign 1.23% 0.59% 0.42% 0.19%
Domestic 1.43% 0.62% 0.45% 0.20%
Source: National Association of Finance, Management and Accounting Executives (Anefac). March/May 2000.
It is clear, therefore, that there is compelling evidence that CPMF rates can be raised significantly without causing bank disintermediation or a remonetization of the economy. The evidence supports the belief that the Single Tax, based on a bank transaction tax, is totally viable, especially considering that rate increases in the transaction tax will occur concomitantly with the elimination of conventional taxes.
Therefore, the tax burden would not increase. To this end, we should note that taxpayers see this as an acceptable option. Everardo Maciel said, “If we ask any Brazilian taxpayer whether he prefers a 30% value-added tax regime, or a 2%
cascading regime, I have no doubt what the answer would be.”165
TABLE 23
Annual income needed to generate CPMF revenue equivalent to bank service fees
Bank service fees
(R$) Number of banks Annual income equivalent to CPMF payment
% of economically active population
65.04 to 69.14 5 17,116.00 to 18,195.00 3,0
74.35 to 98.48 5 19,566.00 to 25,915.00 2.8
100.47 to 128.30 6 26,440.00 to 33,763.00 2,0
130.30 to 154.68 4 34,290.00 to 40,706.00 1,0
Source: National Association of Finance, Management and Accounting Executives (Anefac). March/May 2000.
165 [MACIEL, 2001].
On the other hand, considering, as the Federal Revenue does, that this tax would not require fiscal bureaucracy (such as invoices, papers return forms, and other information usually required by traditional declaratory taxes), the cost-benefit relationship of this new tax model would be very favorable. “Collection of this tax occurs practically without any operational cost to the tax administration and to the taxpayer,” and would thus permit us to forecast the downsizing of the public bureaucracy as a result of reducing the tax burden to be extracted from the private sector.