TAX REFORM AT A DEADLOCK

Changes within Brazil’s society and economy since the last celebrated tax reform, in 1965, have created an accumulation of distortions within our tax system.

Several attempts at reform have ended in failure, including the “Sayad Commission”

in 1986, followed by the “Ary Oswaldo Commission” (both were commissions of the executive branch), and the constitutional revision convention of 1993/1994 (a frustrated attempt by the legislative branch).

Official tax policy during the last presidential terms, pressed by the demands of economic stabilization and by the limitations imposed by external constraints, has emphasized revenue productivity and reliability, to the detriment of rationality within the tax system. Preference has been given to investing in easily collectable taxes, which overburden a given set of taxpayers and postpone the solution to ever-increasing distortions and inequities in the tax system.

The Union’s cumulative contributions, because they are not shared with other

186 [SECRETARIA DA RECEITA FEDERAL, 2002(c)].

entities of the federation [states and municipalities], have grown during this period.

Income tax has shrunk in order to meet expectations of foreign investors and large taxpayers, resulting in overwhelming taxation, almost exclusively, of the upper strata of the working middle class.

During the last fifteen years, when several attempts at reforming the tax system were tried, it was tacitly agreed that demands for tax reform were to be centered on consumption taxes. The government invested in a unified value-added tax program without conviction. Even the Secretary of the Federal Revenue has admitted, years later, that he does not consider this tax to be practicable in the foreseeable future.

A perception that had been blurred in the past now became clear: that our peculiar federal system cannot handle a VAT. It also became clear that, although the VAT may satisfy large industry and trade, it harms the service sector and huge numbers of small entrepreneurs.

PEC No. 175/95 (one of the government’s many tax reform proposals), after producing a lot of heat and little light, is now buried.¹⁸⁷ By 2001/2, the only thing it accomplished was to give birth to a modest by-product: a non-cumulative, restricted, experimental, and time-scaled bill for the PIS/PASEP, which was in the interest of large taxpayers and export business owners.

In the meantime, tax burden grew by 4 percentage points, between 1994 and 2001, and the tax revenue administered by the Federal Revenue showed a real growth of 54%. Most significantly, inequity in tax incidence increased, which should make tax reform a priority in terms of public discussion.

The most crucial challenges to Brazil’s public administration are: a) the necessary reduction of the overall tax burden (which, however, as a precondition, must redistribute tax costs more equitably across a much broader taxpaying universe), and b) a more rational fiscal policy in order to exonerate labor and production costs, and to stimulate economic growth.

According to an academic study undertaken at the University of São Paulo (FIPE/USP) for the Industrial Federation of the State of São Paulo (Fiesp), the focus on consumption taxes as a priority in tax reform is misguided. In order to correct tax imbalances, the predominance of consumption taxes in Brazil should be inverted in favor of income and property taxes, bringing our system into harmony with models used throughout most of the developed world, that is, a model which taxes consumption lightly, with income tax providing the bulk of public revenue. It is likely that Brazilian industry and exporters would more easily accept taxing consumption if it were more lightly applied, and if income and property taxes were predominant, as it is in the United States, England, Japan, the Scandinavian countries, and others.

Other analysts, such as the staff of BNDES [National Economic and Social

187 However, a similar project was presented by President Lula in 2008.

Development Bank] and IPEA [Institute for Applied Economics Research], understand that a developing country, with its significant income and wealth inequalities – as is the case in Brazil – can only rely on indirect taxation, while at the same time seeking to apply it in the least distortionary possible manner.

Concerning this last suggestion (but contrary to the IPEA’s theoretical postulations that favor value-added taxation), the Federal Revenue has published a series of empirical studies on its website. These studies suggest that the effect of cumulative taxes, such as the CPMF and the PIS/Cofins, are not regressive, as had been thought, but rather seem uniformly proportional at all levels of purchasing power, closely approximating the effect expected by an ideal VAT, scoring better than the ICMS [Tax on the Circulation of Goods and Transportation and Communication Services] or IPI [Tax on Industrialized Products] with their selectivity and their value-added technique.

It is suggested that taxes that are apparently unsophisticated and insensitive to individual differences, such as taxes on gross income and bank transactions – which are simple, moderate, and less prone to evasion – ultimately engender economic effects that are less distortionary than those of sophisticated net income or value-added taxes with high rates, which are very complicated, heterogeneous, and easy to evade.¹⁸⁸

Recent studies done by Federal Revenue on the experience with the CPMF (a bank transactions tax), confirm the theoretical simulations and observations on which Professor Marcos Cintra has been insisting for some time, claiming that regressiveness of such cumulative taxes is illusory.

So many years of failures and hugely disappointed efforts attest to the exhaustion of our traditional tax reform paradigms.

It does not seem that unifying consumption taxes into an all inclusive value-added tax would be practicable over the medium term, given the conflicts within our federal structure and the dependence of Brazilian states on the current ICMS. Nor can the federal government, risk losing part of the revenue it collects with its gross income taxes.

The challenges that remain are finding ways to ease tax pressure through more equitable tax incidence, preventing tax avoidance, and including the informal economy, without seeking an unrealistic solution that would result in significant growth of the tax collection and auditing apparatus.

In view of these difficulties, taxation of bank transactions appears to be a plausible pathway to tax reform. Bank transactions, as a tax base, would differ little from consumption and gross income, which are Brazil’s current predominant tax bases. A bank transaction tax would offer advantages in that it costs little, is simple, light, has universal scope, and is difficult to evade.

188 This point will be further elaborated in this text.