(Picture: Marcello Casal Jr)
New Rules Bring Country Closer to More Egalitarian Nations, Experts Say
The draft law (PL) proposing income tax (IR) exemption for those earning up to R$ 5,000 and taxation for individuals with a monthly income exceeding R$ 50,000, if approved by the National Congress, could bring Brazil closer to the tax systems of countries with lower inequality, such as France and Germany. This is the assessment of Clara Zanon Brenck, an economics professor at the Federal University of Minas Gerais (UFMG).
“More egalitarian countries, such as the most developed in Europe, tend to tax more progressively. Brazil, by making this change, will move closer to these countries,” she told Agência Brasil.
Details of the Proposed Income Tax Reform
Last Tuesday (18th), President Luiz Inácio Lula da Silva submitted the PL to Congress. In addition to exempting workers earning up to R$ 5,000 per month from income tax, the text also establishes tax deductions for the salary range between R$ 5,000 and R$ 7,000.
Conversely, the proposal introduces a tax rate for individuals with an annual income above R$ 600,000 – an average of R$ 50,000 per month. This taxation on the wealthy aims to achieve what experts call fiscal neutrality, meaning the revenue the government will no longer collect from lower-income individuals will be compensated by taxing high-income earners.
Fiscal Impact and Beneficiaries
According to calculations by the Ministry of Finance, around 10 million Brazilians will stop paying Income Tax, representing an estimated fiscal waiver of R$ 25.84 billion.
This amount will be offset by taxing 141,300 taxpayers. The income tax base for these taxpayers will include currently exempt income, such as dividends (distribution of company profits).
According to the Ministry, nine out of ten Brazilians who currently pay income tax will have full or partial exemption under the new rule. Of the income tax filers, over 26 million (65%) will pay no tax at all. Taxation on high incomes will affect only 0.13% of taxpayers and 0.06% of the total population.
Tax Justice as a Tool to Reduce Inequality
Economist Clara Brenck explains that the concept of tax justice is based on the idea that “those who earn more will pay more proportionally to their income.”
She exemplifies that if a person with an income of R$ 5,000 pays R$ 500 in income tax (10% of income), and another with an income of R$ 500,000 pays R$ 50,000 (also 10%), there is no tax justice.
“You have people paying the same amount of tax, regardless of their income,” points out the professor, who is also a researcher at the Center for Research in Macroeconomics of Inequalities (Made) at the Faculty of Administration, Economics and Accounting (FEA) of the University of São Paulo (USP).
According to her, alongside income distribution policies, tax justice plays a “very important” role in reducing inequality in a country.
Challenges and Perspectives of Taxing the Top of the Pyramid
For the professor, the proposed changes represent progress towards reducing inequality, although they may still not be sufficient. Calculations by Made indicate that a rate close to 15% for the wealthiest would be more effective in ensuring that both high-income individuals and the majority of the population who pay tax would feel the same effective tax burden.
In defending the proposal, the Minister of Finance, Fernando Haddad, has emphasized that the effective tax rate for the middle class is currently around 10%.
“The great merit of this proposal is that it opens an avenue for us to discuss tax justice,” Haddad stated on Thursday (20th) in an interview with the program Bom Dia, Ministro, broadcast by Canal Gov, of Empresa Brasil de Comunicação (EBC).
Professor Brenck considers the threshold of R$ 50,000 per month as a target for progressive taxation to be appropriate but believes that these individuals are not necessarily “super-rich.” “We cannot call them super-rich,” she says, before adding: “it is more than fair for these people to start paying more and for it to increase progressively.”
Impact of Indirect Taxation
Another factor that hinders the reduction of inequality, according to the UFMG professor, is indirect taxation, which falls on the consumption of goods and services. This form of taxation leads lower-income individuals to pay, proportionally, a larger share of tax compared to the wealthy.
Clara Brenck notes that the first phase of the tax reform, which unified taxes and had its regulation sanctioned at the beginning of this year, did not solve this problem because the issues of direct and indirect taxation were treated separately.
“From the moment you separate the indirect tax reform from the income tax reform, you maintain the proportion of indirect tax in the total tax burden, and that is the problem,” she assesses.
“It was necessary to change this composition of how much [of the revenue] comes from direct income tax and how much comes from indirect tax. By doing the two reforms separately, you cannot change the proportions,” she adds.
The economist also advocates for the need to adjust the values of taxed income brackets for inflation over time, so that progressive taxation continues to reach the desired income strata. “What we call super-rich today will be different in 10 years.”
Income Inequality in Brazil
In Brazil, the income of the richest 10% is 14.4 times higher than that of the poorest 40%, according to the Brazilian Institute of Geography and Statistics (IBGE). The effort to reduce this inequality is one of the government’s main platforms to persuade Congress to approve the draft law.
“We are among the ten worst income distributions in the world. This is what we have to explain to society. Brazil is among the ten countries with the worst income distribution in the world,” Haddad emphasized.
“There are many people with income who agree with social justice. Just because a person has income does not mean they will stop voting for a fair project. You can be sure, many people there [represented in Congress], business owners, farmers, will vote in favor of this project because they know it is fair,” the minister hopes.
Processing of the Bill in Congress
The text sent by the government to Congress will need to be approved by the Chamber of Deputies and the Senate to take effect. During this process, the matter may undergo changes by the parliamentarians.
The President of the Chamber of Deputies, Hugo Motta (Republicanos-PB), stated that Congress will have the sensitivity to recognize the social scope of the proposal but did not rule out the possibility of adjustments to improve the measures.
João Leme, an analyst at Tendências Consultoria, told Agência Brasil that the PL “can be considered an advance in terms of tax justice” and correct some distortions inherent in the Brazilian dynamic, such as the high proportion of tax-exempt income for the wealthiest, exemplified by dividends.
However, he warns of the risk that the part of the proposal dealing with the taxation of the wealthiest may not be approved by Congress.
“There is a risk that these fiscal counterpart mechanisms will end up being diluted or excluded during the legislative process, which would make the measure backfire, given that the fiscal cost would not be properly equalized, increasing fiscal uncertainty, deteriorating expectations, and complicating the government’s fragile political and economic equilibrium,” he analyzes. “The expectation is that the government’s articulation teams will push for the maintenance of these counterweights.”
Extremes of the Social Pyramid
Researcher Marcos Hecksher, from the Institute for Applied Economic Research (Ipea), an agency linked to the Ministry of Planning and Budget, believes that the most important and challenging part of the PL is to ensure that those who earn more than R$ 50,000 per month on average start paying more tax.
For him, making taxation more progressive, with fewer exemptions and tax breaks for the wealthiest, is essential for reducing inequalities, in a way “that allows the country to fulfill one of its fundamental objectives established in Article 3 of the Federal Constitution of 1988, which is to reduce social and regional inequalities.”
Hecksher, a specialist in income inequality, points out that the government’s proposal directly benefits “those in the middle of the income distribution, not at the base.” In this way, he draws attention to the part of the governments’ budget dedicated to income transfer programs, such as Bolsa Família.
“The reduction of income inequalities carried out from 2001 to 2014 was heavily concentrated in increased public spending aimed at the poorest,” he cites.
Resumo em Português:
O governo brasileiro propôs um projeto de lei para isentar do Imposto de Renda quem ganha até R$ 5 mil e taxar quem recebe acima de R$ 50 mil por mês, visando reduzir a desigualdade e aproximar o sistema tributário do de países mais igualitários. A proposta também cria descontos para a faixa entre R$ 5 mil e R$ 7 mil. A perda de receita com a isenção será compensada pela taxação de altas rendas, incluindo dividendos. Especialistas veem a medida como um avanço, mas alertam para desafios na aprovação pelo Congresso e para a necessidade de abordar também a tributação indireta e manter programas de transferência de renda para os mais pobres.
Resumen en Español:
El gobierno brasileño propuso un proyecto de ley para eximir del Impuesto sobre la Renta a quienes ganan hasta R$ 5 mil y gravar a quienes reciben más de R$ 50 mil al mes, con el objetivo de reducir la desigualdad y acercar el sistema tributario al de países más igualitarios. La propuesta también crea descuentos para el tramo entre R$ 5 mil y R$ 7 mil. La pérdida de ingresos por la exención se compensará con la tributación de las altas rentas, incluyendo dividendos. Los expertos ven la medida como un avance, pero advierten sobre los desafíos en la aprobación por el Congreso y la necesidad de abordar también la tributación indirecta y mantener programas de transferencia de ingresos para los más pobres.
