THE SINGLE TAX ON BANK TRANSACTIONS
THE VIRTUES OF BANK TRANSACTION TAXES
A bank transaction tax is a good tax if it is used as a single tax; but is a bad tax if added onto many others. The CPMF was created as one more tax to be added to Brazil’s fiscal paraphernalia.
The Government disfigured the proposal of the Single Tax on bank transactions.
Conceived to be the basic tax for the entire fiscal system, it was ultimately reduced to a dishonorable role as one appendix in the nation’s confusing tax structure. The Government acted as a rapist who, in its brutality, sees nothing but the immediate object of its appetite. It completely ignored the virtues of the Single Tax – such as reducing bureaucracy, instilling morality, and promoting development. Instead, it adopted the tax solely for its high capacity to raise revenue.
However, even if spurious, the CPMF produced a worthy result, in that it allows an accurate evaluation of the efficiency of the bank transactions tax, which is the foundation for the Single Tax construct.
Described by adversaries as a hated cascading tax, the CPMF is called by every offensive name that can be given to an innocent tax: dumb, unfair, anti-production, anti-savings, and harmful to exports. Several political analysts, financial reporters, and especially collectors and other tax professionals criticize cumulative taxes, while heaping praise on value-added taxes, such as the ICMS. They support VATs as if they were the eighth wonder of the world. They consider them to be fair, neutral, and efficient.
Reading the literature on the tax reform debate, a rookie economist who believes
81 [UNGER, 1998(a)].
82 [TANZI, 2006], p. 24.
everything said by adversaries of turnover taxes, cannot avoid the impression that the simple elimination of turnover taxes would redress all that is wrong with it, and that with a simple flick of the wand Brazil’s tax system would become rational, fair, modern, and efficient.
There is nothing more mediocre than to accept, without rigorous critical evaluation, the prejudices and clichés contained in these opinions. The CPMF and its experience in Brazil brought to light many positive aspects of this tax.
It is not necessary to overemphasize its virtues. All one needs to do is consider that with rates of merely 0.38% (0.30% from June 2000 to March 2001) and with practically no costs to the government or to the taxpayer, the CPMF raised R$ 14.4 billion in 2000, approximately R$ 17.1 billion in 2001, and R$ 36.2 billion in 2007.
Taxes that are highly complex and carry high administrative costs, such as the IPI (a federal value-added tax on industrial products) and the corporate income tax, generated revenue of only R$ 18.8 billion and R$ 17.6 billion in 2000, respectively;
R$ 19.4 billion and R$ 17 billion in 2001 and R$ 32.9 billion and R$ 70 billion in 2007.
The CPMF is universal, evasion-proof, and it grasps all economic agents, eliminating the inequity of self-assessed, paper-driven taxes that impose high tax burdens on some taxpayers while favoring tax evaders and expert tax planners who enjoy markedly lower individual burdens. The CPMF is able to eliminate the greatest anomaly present in the current tax system, which is artificial production cost differences and consequently unfair competition caused by widespread tax evasion.
Tax avoidance and evasion distort desirable patterns of distribution of the tax burden, and this distortion is more serious and disrupting than the alleged distortions in relative prices that a turnover tax, such as the CPMF, might be causing to Brazil’s economy.
Concerning this issue, Everardo Maciel says, “The literature of public finance is full of examples of economic distortions caused by taxes. What is not stressed, however, is that the comparisons presume a context in which tax evasion is non-existent or of little relevance. This, however, is not the reality in emerging countries.
In these countries, to parody a well-known aphorism, one might say, create a tax, create evasion.” He continues, “ultimately, what we intend to assert is that tax evasion in emerging countries is the greatest economic distortion caused by taxes, far superior to any other.” 83
Notwithstanding, IPEA (a Brazilian government-sponsored think tank) states the
83 Everardo Maciel reinforces his argument, by asking: “is there any better way to send Brazilian industry to ruin than to submit it to competition that uses under-invoicing or false import papers?
Tax evasion, some would say, should be dealt with through auditing and punitive measures. In emerging countries, this is a partial truth. Inspection and punitive measures are insufficient. It is indispensable that the concept of a tax itself prevent evasion as much as possible. Complex taxes are fertile ground for tax evasion, not to mention avoidance. Tax evasion, in these cases, requires prevention rather than cure or punishment.”[SECRETARIA DA RECEITA FEDERAL, 2001(b)].
following: “The injurious elements of cumulative taxation can be classified into two groups: it harms the allocation of resources and the competitiveness of domestic goods. These distortions are due to the fact that this type of tax unintentionally and uncontrollably alters the economy’s relative prices.” 84
To respond to this assertion, we should invert the argument and ask its authors if the changes in relative prices introduced by value-added taxes are intentional and controllable in an environment with widespread tax evasion and avoidance, as happens in Brazil An inevitable conclusion is that taxes that are easily evaded, such as VAT-style self-assessed taxes, certainly create even more unintentional and uncontrollable changes in relative prices, because nothing is as unpredictable or uncontrollable as tax evasion.
The Brazilian economic environment has greatly changed in the present computerized and globalized world. Thus, one should not imagine that conventional taxes, created during the time when information technology was based on paper, on accounting ledgers, on physical transportation, on economic isolationism and on political fragmentation, such as prevailed during most of the 20th century, will be able to avoid widespread tax evasion and its dramatic consequences. Conservative tax policies will only deepen such inadequacies in the future.
In a country like Brazil, that suffers from all sorts of administrative deficiencies, from a slow and inefficient judicial system, from a weak and discredited tax auditing apparatus, and from a deeply rooted culture of tax evasion, it is easy to understand the reason for so much criticism aimed at the CPMF. It corrects such anomalies.
After all, for rent seekers, it is preferable to “pay” taxes on profits and on value-added, since they can be easily manipulated by delinquent taxpayers, than to have a tax system that eliminates privileges, prevents avoidance, and turns universal the set of taxpayers in the country.
The CPMF has been used successfully to achieve extremely important objectives, such as fiscal balance and currency stability. Still, there is generalized rejection against it although, if it did not exist, conventional taxes, which are always more inefficient and inequitable, would require even higher rates than they do at the moment.85 Therefore, the criticisms about cumulativeness need to be more deeply analyzed, and cannot be uncritically accepted.
84 [VARSANO et alii, 2001].
85 Another common criticism of the CPMF states that its automatic collection mechanism disregards the principle of contributive capacity. However, critics forget that this principle is not upheld in conventional taxes such as the IPTU, ISS, IPVA, or ITR, and not even in value-added taxes such as the IPI or ICMS, because these are due irrespective of the profit earned. Those who deny the notion that taxes can only be collected when contributive capacity is assessed respond by stating that, according to the benefit principle of taxation, even in a loss, companies benefit from the country’s infrastructure and, therefore, should pay taxes.
INCIDENCE AND EQUITY OF BANK TRANSACTION TAXES
One of the most frequently raised questions about a bank transaction tax has to do with its progressiveness. Critics claim it is regressive.
Actually, because it is a cumulative (turnover) tax, products that involve a greater number of transactions along the productive chain – with more roundabout production methods – and those that add less value at each stage, will be more heavily taxed. Thus, the Single Tax system should have a natural degree of progressiveness given that wage goods – staple products that make up the demand bundle for lower income families– would tend to have a lower tax burden than that of relatively more sophisticated products. Wage goods usually have less roundabout production chains, with less processing and a high rate of added value relative to the value of inputs at each production stage.
Another interesting feature of the Single Tax proposal is that income and production become no longer the main components of the tax base, as happens in conventional tax systems. The tax base would shift to financial transactions. Thus, productive activities become less taxed, and those that involve mere asset transfers, that currently are notoriously under-taxed, such as estate and personal property transactions, would be more heavily taxed.
The Single Tax proposal has, therefore, some essential characteristics that must be stressed: it ensures tax collection; it eliminates tax evasion and fiscal corruption; it increases efficiency of tax collection; it frees up significant resources in the private and public sectors; it is a comprehensive system; and it exhibits natural progressiveness.
Maria da Conceição Tavares evaluated the alleged regressiveness of bank transaction taxes, considering their incidence by income brackets. In her article
“Imposto sobre circulação financeira”86 (a Tax on Financial Circulation) the author says, “The argument that the tax would basically penalize the middle class is unjustified. This is a tax that primarily penalizes individuals who turn the financial circulation of their savings into an extra and often considerable source of income.”
She further states, “because they are one of the dynamic vectors in the economic restructuring and globalizing process, bank transactions constitute one of the few potential bases for future taxation in which it is possible to anchor public revenue increases without punishing the productive sectors and the needier social segments”.
Because of the difficulties in simulating transactions for businesses and financial institutions, the results presented in her article refer to a partial revenue base, restricted to individuals, on whom a tax similar to the CPMF would be levied at a rate of 0.25%. The conclusions of the exercise rebut arguments that a bank transactions tax is unfair because it is regressive. Her conclusions (although they may have lost some validity given the increasing use of bank transactions by all income groups) are reproduced here, in full:
86 [TAVARES, 1995].
“1 - The lower-income groups, with average monthly income equal to 1 to 3 minimum wages and half of the group with average monthly income equal to 4 minimum wages – which together account for 70.6% of the reference population (income receiving individuals older than 10 years of age that are economically active) – are presumed not to use the banking system and therefore would not be directly affected by the tax.
2 - Of the remaining 29.4% that operate through the banking system, the tax burden falls predominantly on the higher-income groups (those with average monthly incomes that fall between 20 and 38.7 minimum wages).
This latter segment, which accounts for a scant 3.4% of the reference population and less than 12% of individuals with bank accounts, holds 29.2% of total income and would account for 63.5% of the IPMF revenue paid by individuals.
The group that has lower incomes (between 7.2 and 14.2 minimum wages per month), which represents 62% of the taxed universe and 18.2% of the reference population, accounts for 31.1% of revenue, whereas this group’s share of income is 38.6%.
Even the upper-middle segment, with average income of 14.2 minimum wages accounts for a smaller share of tax revenue than it should, given its total income. In other words, the argument that the tax would unfairly penalize the middle class is not supported. This is a tax that burdens those individuals who make bank transactions an extra and considerable source of income.
3 - The average effective rates on members of each group are also progressive, varying from 0.25% (affecting only that lowest-income portion of the group, which is taxed only once at the time of salary withdrawal), up to 0.70% levied on the group whose average monthly income is equal to 38.7 minimum wages.
Rate progressiveness is determined by values attributed to coefficients of financial circulation. The underlying theory is that greater savings coefficients correspond to higher income levels, and that the lion’s share of those savings goes into financial investments.
The portion of income that is earmarked for this purpose is expressed by the financial investments coefficient. This coefficient, in turn, is associated with a greater number and volume of transactions; in other words, a higher turnover rate of financial credits and debits. The relationship between the volume of transactions performed during the year and income determines the magnitude of the financial circulation coefficient.
4 - Finally, the index of progressiveness, presented in the simulation (which expresses the relationship among differentials of taxation and of average income among various taxable groups), shows absolute values that are increasing and greater than unit.
This indicates that higher-income sectors not only pay relatively more taxes, but they also pay at proportions that are much higher than the differences between
their average income and that of other groups.”
Conceição Tavares’s simulation truly demonstrates that an electronic transactions tax is proportional, or slightly progressive. It burdens more intensely those who have greater resources.
From the standpoint of corporations (which were not included in the exercise), the author says that, the greater the volume of bank cash withdrawals, that is, the greater the circulation coefficient and the turnover rate of financial capital, the greater will be the participation of the tax on the volume of income invested in the financial system.
Concerning the impact of the tax on prices, Tavares concludes that it should not be significant and it would not trigger (as it has not triggered) financial disintermediation.
Summarizing, Conceição Tavares says that an electronic tax is desirable, given that it does not create distortions in the productive structure and is levied proportionally on taxpayers. Furthermore, it reaches the informal sector and minimizes tax evasion. In other words, bank transaction taxes are shown to be reasonably progressive taxes in their patterns of incidence, directly contradicting those who accuse them of being regressive. The tax falls more heavily on rentiers, whether “formal” or “informal”. Maria da Conceição Tavares concludes by stating,
“Financial circulation is the tax base of the future, given that, in addition to its continual expansion, it allows for electronic controls and, therefore, should allow for less tax evasion than is allowed by current taxes.”
As a direct tax, the bank transaction tax – in its formal expression – is neither progressive nor regressive; it is proportional, as long as it has a single rate. This means that for each individual transaction, the single rate would guarantee incidence that is proportional to the value of the transaction. Indirectly, as it becomes an item in production costs, it is alleged to be regressive.
Zockun M. H. estimated that the CPMF accounted for 2.2% of family income for the lowest income bracket (two monthly minimum salaries), and only 1% for families in the highest bracket (thirty or more monthly minimum salaries).87
Such results were not confirmed by other estimates, such as those of Paes and Bugarin showing a virtual proportionality in the CPMF incidence by income classes, varying from 1.31% and 1.33% of family income.88 Using family budget research by IBGE I estimated that the tax burden of the CPMF on total expenses were the following: 1.64% for families with 1.2 minimum salary of monthly earnings, 1.58%
for the 3.20 minimum salaries bracket, 1.51% for the 6.5 minimum salaries bracket, and 1.41% for the 23 minimum salaries bracket. According to estimates by the Ministry of the Economy made public in Congressional hearings in 2007 the CPMF
87 [ZOCKUN, 2007(b)].
88 [PAES and BUGARIN, 2006].
is a “redistributive” tax, both by income classes and by regions of the country.
According to the presentation 72% of the CPMF is collected by companies, and only 28% by individuals; of the revenue collected from individuals 17% are collected from the richest 10% of the population, and only 2% of revenue comes from the poorest 50% of the population. Actually it is very closely a proportional tax if we take account of possible measurement and estimation errors.
However, what really interests economists is the evaluation of tax incidence from the perspective of the complete set of transactions performed by individuals in the market. In this sense, the bank transaction tax can have a natural progressiveness, inherent to the different patterns of expenditures of the various income brackets of Brazil’s population, as shown by Tavares.89
Furthermore, a more equitable distribution of national income must not be sought solely through progressiveness in taxation, but rather through the final impact of the fiscal process, which is comprised not only of the pattern of taxation, but more importantly by the composition of public expenditures, which can be progressive or regressive. The Ministry of the Economy showed that the poor northern and northeastern regions of the country collect only 24% of the CPMF revenue, but receive 42% of the CPMF collected by the federal government. Thus, the CPMF is not as regressive as claimed.
The concept of tax progressiveness has been strongly attacked by several scholars. Indeed, “progressive taxation appears to have lost much of its political appeal…people became increasingly convinced that the economic costs of progressiveness were too high to make it worthwhile”. Furthermore, “what can be done through the tax system to redistribute income … no matter how extreme such redistribution might be, is unlikely to have much effect on the overall distribution of income”.90
Ives Gandra91 points to “the noticeable trend of European economies to begin, gradually replacing direct taxation, which has always been considered socially equitable, for indirect taxation, believed by economists to be regressive and anti-social. And the most curious consequence of this trend is that countries that have begun to reduce direct taxation have shown an increase in investments; and increasing investment is socially fairer because it generates growth, jobs, and better social conditions, facilitating the exercise of labor rights. On the other hand,
89 [TAVARES, 1995]. See also [CINTRA, 1994(b)]. In there I stated, “it is true that at the margin, that is, for products analyzed in isolation, the Single Tax is regressive. However, what needs to be evaluated is the progressiveness on average of all family expenses, and in this case the Single Tax would be progressive. (...) I should add that what we seek is progressiveness of the fiscal process, and not only tax progressiveness. Progressive taxation is not worth much if public spending is regressive, benefitting those who least need governmental resources. (...) the concept of ‘progressiveness at any cost’ has been quickly wearing down from the standpoint of public policy”. (p. 226).
90 [BIRD, 2003] p. 19.
91 [MARTINS, 1990].
progressive direct taxation (...) ultimately causes recession and inflation, with unemployment, lower wages, and less possibility for a proper dialogue on the claims of the labor class. Europe, well into the 1980s, decided openly to head toward abandonment of ideological social justice theories, which are inhibitors of development, and to begin to thread the pathways of the practical theories of
progressive direct taxation (...) ultimately causes recession and inflation, with unemployment, lower wages, and less possibility for a proper dialogue on the claims of the labor class. Europe, well into the 1980s, decided openly to head toward abandonment of ideological social justice theories, which are inhibitors of development, and to begin to thread the pathways of the practical theories of