Underground economy grows in Brazil

The share of the underground economy in the Brazilian economy reached around 17,8% of GDP in 2022, as shown by the Underground Economy Index (IES). This result is higher than that observed in 2021 (17,4%) and points to a return to the pattern of elevations observed in the pre-pandemic period. The index built in a partnership between the Brazilian Institute of Ethics and Competition, ETCO, and FGV IBRE measures the evolution of the underground economy since 2003 and seeks to capture the evolution of activities that operate outside the laws and regulations that affect formal activities in the country .

The increases observed in the indicator up to 2019 were a consequence of the crisis that began in mid-2014, which reduced the formal sector of the economy, and the slow recovery of economic activity, concentrated in its most flexible part, the informal economy, which was pulling the employment in the country. At the same time, the reduction in interest rates and the slow increase in income softened the shadow economy's growth scenario, which would be stronger in the absence of these factors.

However, the events of recent years associated with the Covid-19 pandemic have extraordinarily raised the level of uncertainty regarding the performance of the economy. The negative impacts on economic activity and on the labor market affected informal workers more intensely, compared to formal workers. This change in the composition of the labor market, with a greater weight of formalization, combined with the sharp reduction in the level of economic activity, contributed to the decline in the Underground Economy Index (IES) in 2020.

After the most acute phase of the pandemic, the process of normalization of economic activity began, stimulating both the formal and informal economy, recording a return of informality to the standards observed in the pre-pandemic period, partly caused by the faster recovery of informal employment , which was to be expected given the greater flexibility in this type of bond, thus, the Underground Economy Index (IES), since 2021, has grown again, reversing the drop observed in 2020.

In the last two years, the return of economic activity has meant that both the formal and informal economy have seen a strong recovery. However, the informal part of the labor market showed stronger recovery in relative terms, causing the IES to present growth in the period, more than offsetting the drop that occurred in the pandemic.

In order to understand this topic in more depth, ETCO (Brazilian Institute of Competition Ethics) and IBRE/ FGV, developed an index to monitor the shadow economy, providing an indicator of the evolution of informal activities. Shadow economy is defined as the production of goods and services not reported to the government, deliberately, to: evade taxes; evading social security contributions; circumvent compliance with labor laws and regulations; avoid costs arising from the rules applicable to each activity.

The index starts in 2003, with the highest value of the historical series, around 21% of the Brazilian GDP. Between 2003 and 2014, in the period of strong expansion of formal employment, the Underground Economy Index showed a strong downward trend, reaching its lowest value in 2014 (16,1%). Since then, as a result of the 2015/2016 crisis, the index has shown an upward trend, interrupted by the COVID 19 crisis. The normalization of economic activity signals a further increase in the index.

Several structural factors stimulate the formalization of the labor market: an increase in the average level of schooling among Brazilians; simplification measures of legal rules that reduce the cost of formalization, such as the implementation of electronic invoices (NFes), SIMPLES, MEIA and the expansion of the credit market reduced the shadow economy in the country in the 2000s, expanding economic activities in accordance with the law.

It is a fact that the economic situation has a strong impact on the underground economy. The 2015/2016 crisis led to the growth of informal employment, stimulating successive increases in the Underground Economy Index between 2015 and 2019.

The advance of the Covid-19 pandemic generated a strong reduction in the space for informal workers, causing the index to decline in 2020, with the change in the composition of the labor market, with a greater weight of formalization, combined with a strong reduction in the level of economic activity .

Since 2021, due to the beginning of economic normalization and the faster recovery of the informal sector, we have noticed an increase in the Underground Economy Index, indicating a return to the pattern of increases observed before the pandemic. In particular, in the year 2022, the weight of shadow economy in GDP was 17,8%. This value observed in 2022 shows that the shadow economy in Brazil moved something close to R$ 1,7 trillion reais, close for example to Sweden's GDP, which correspond to something close to 18% of Brazilian GDP, according to IMF data. .

Due to lower costs, the recovery of the labor market was encouraged by informal employment, with the possibility of a further increase in the shadow economy indicator in the coming years. Therefore, the decrease in the index will depend on the speed of recovery of the economy and the progress of the necessary reforms to stimulate the economy.

The good news is that the structural factors that led to the reduction of shadow economy remain present in the Brazilian economy. In particular, the process of simplifying norms and regulations remains active (with prospects of expansion by the current government), the average Brazilian education continues to increase and the credit market should return to its growth trajectory. In addition, the effects of the labor reform should continue to stimulate the formalization of the labor market, reducing its cost. On the other hand, the creation of the PIX should strengthen, in the coming years, the use of formal payment mechanisms, facilitating the measurement of economic activities and, therefore, in the long term, allowing the reduction of the informal share in the Brazilian GDP.

* Edson Luiz Vismona (president of ETCO – Brazilian Institute of Ethics in Competition) and Fernando de Holanda Barbosa Filho – economist at FGV/IBRE

spending

The title of this article refers to a word not yet incorporated into Brazilian dictionaries. In Portugal, however, it has already been endorsed by the renowned dictionary of the Lisbon Academy of Sciences, which defines it as the “practice that consists in the exaggerated expenditure of money, in the realization of excessive expenses or expenditures and little evident utility, especially on the part of the State. or other public entities”.

In the recent election campaign, I didn't hear any candidate for any office mention cutting wasteful spending. On the contrary, many defended, often as a mere demagogic appeal, the expansion of expenses.

It is reasonable to admit that some proposals for new expenditures are justified, but they should be accompanied by measures aimed at containing expenditure, otherwise their financing will be at the expense of raising the known high tax burden, or an irresponsible increase in public debt.

In addition to extreme weather events, it cannot be ignored that the next government will face an adverse international scenario, involving inflation and recession in developed countries, economic slowdown in China impacting commodity exports, energy crisis in Europe, hunger in Africa and an unpredictable trajectory. in Russia's aggression against Ukraine.

In the context of the enormous needs of the Brazilian State, it would be advisable, although unlikely, to implement a program to restructure public spending, which would honor the efficiency, proclaimed in art. 37 of the Constitution, and eliminate spending.

There is an inexhaustible list of expenses that drain revenue and compromise the provision of public services: the evil secret budget, a permanent source of misuse of public money and corruption; the positions of deputy in the Executive Power of the Union, States and Municipalities; parliamentary “representation” quotas; the remuneration and “advising” of councilors in small municipalities, which subsist at the expense of transfers; the remuneration of public agents for participation in boards of state-owned companies; the working hours of the military police, which allows the provision of private services or participation in “militias”; the “indemnities” in the Legislative and Judiciary Powers, and in the Public Ministry; the excess of diplomatic representations abroad, without any economic or political foundation; double vacations and conversion into remuneration, special holidays and recesses in the Judiciary and the Public Ministry. Utopia? Certainly.

 

THE INTERDEPENDENCE OF THE BRAZILIAN STATE

Throughout the history of Brazil, we have traveled an extensive journey towards the consolidation of a national identity and, with it, the realization of the interdependence that should unite us in the construction of our destiny.

These postulates highlight a fundamental aspect of any civilized society: the preservation of coexistence. All existing rules seek to preserve peaceful relationships between people, environmental sustainability, overcoming social inequalities, seeking justice and social harmony. There is a clear sense of utopia that, as the filmmaker Fernando Birri taught; “Utopia is there on the horizon. I approach two steps, she moves two steps away. I walk ten steps and the horizon runs ten steps. As far as I walk, I will never reach. What is utopia for? That's what it's for: so that I don't stop walking.”

Life in society presupposes recognition and the need to preserve our relationships, permanently encouraging ethics, inclusion, diversity, postures that, lately, have also been valued in the corporate environment with the adoption of ESG metrics, bringing companies, finally, the defense of human rights.

However, actions aimed at strengthening coexistence are threatened. The political debate attests to a radicalization that distances understanding, opposing opinions are violently attacked, without attachment to argumentation, and the “cancel culture” spreads. The opposite is not an adversary but an enemy.

This environment has deep roots in our history. Disrespect for rights are plentiful, sponsored by government officials and supported by parts of society – increasingly suspicious according to a global survey by the Ipsos Institute. The investigation released by Veja shows that when asked “Do you trust others?” made to 22 people in thirty countries, Brazil appears in last place.

Corruption scandals, the sense of impunity that contaminates the whole of society, the profound inequality and certainly difficulty in enforcing the most basic consumer rights are clearly harmful to our coexistence. Yes, our past and what we are living in the present are not encouraging, but they can serve as fuel to change the future.

By remembering that our mutual dependence is the reality that should mean union and that it is possible to overcome our countless difficulties with dialogue, tolerance, without subservience. Thus, we can question and find ways. Utopia? Perhaps, but as Birri taught, this should be our way.

spending

The title of this article ('Despesismo') refers to a word not yet incorporated into Brazilian dictionaries. In Portugal, however, it has already been endorsed by the renowned dictionary of the Lisbon Academy of Sciences, which defines it as the “practice that consists in the exaggerated expenditure of money, in the realization of excessive expenses or expenditures and little evident utility, especially on the part of the State. or other public entities”.

In the recent election campaign, I didn't hear any candidate for any office mention cutting wasteful spending. On the contrary, many defended, often as a mere demagogic appeal, the expansion of expenses.

It is reasonable to admit that some proposals for new expenditures are justified, but they should be accompanied by measures aimed at containing expenditure, otherwise their financing will be at the expense of raising the known high tax burden, or an irresponsible increase in public debt.

In addition to extreme weather events, it cannot be ignored that the next government will face an adverse international scenario, involving inflation and recession in developed countries, economic slowdown in China impacting commodity exports, energy crisis in Europe, hunger in Africa and an unpredictable trajectory. in Russia's aggression against Ukraine.

In the context of the enormous needs of the Brazilian State, it would be advisable, although unlikely, to implement a program to restructure public spending, which would honor the efficiency, proclaimed in art. 37 of the Constitution, and eliminate spending.

There is an inexhaustible list of expenses that drain revenue and compromise the provision of public services: the evil secret budget, a permanent source of misuse of public money and corruption; the positions of deputy in the Executive Power of the Union, States and Municipalities; parliamentary “representation” quotas; the remuneration and “advising” of councilors in small municipalities, which subsist at the expense of transfers; the remuneration of public agents for participation in boards of state-owned companies; the working hours of the military police, which allows the provision of private services or participation in “militias”; the “indemnities” in the Legislative and Judiciary Powers, and in the Public Ministry; the excess of diplomatic representations abroad, without any economic or political foundation; double vacations and conversion into remuneration, special holidays and recesses in the Judiciary and the Public Ministry. Utopia? Certainly.

 

 

The taxpayer and the state

The thinker Alceu de Amoroso Lima taught that “Brazil began at the end” since when we were found, the State, Portuguese sovereignty imposed itself, the people came later.

I use this phrase to demonstrate that the power of the State is decisive in the Brazilian reality. We know the difficult relationship that the citizen has with the public power. Notwithstanding article 5 of the Federal Constitution defining our fundamental rights and guarantees as stony clauses, the recognition and practice of these rights faces great difficulties on a day-to-day basis. It is common for rulers to confuse the State with the government and the latter with their political parties and personal interests.

The tax area reproduces these difficulties. The tax action, with the argument that it is defending the public interests of the treasury, sometimes goes beyond limits in the interpretation of the law, through decrees, ordinances and regulations, pointing to the taxpayer the path of administrative and judicial litigation. Thus, it is not surprising that we have the largest tax litigation in the world, with more than BRL 5.0 trillion under discussion.

Aware of this context, the ETCO Institute, at the suggestion of the chairman of its Advisory Board, doctor Everardo Maciel, contracted, together with the EY consultancy, a technical study on the instruments of defense and protection of the taxpayer in Brazilian legislation and in international comparative tax law. The following were addressed: Current scenario; The Brazilian taxpayer at the federal and state levels (with the mapping of existing constitutional and infra-constitutional norms) Comparative analysis: foreign instruments to protect the taxpayer. The proposal is to identify how the taxpayer is treated in Brazil and in countries with the best practices so that we can reflect on how to evolve in the taxpayer's relationship with the tax authorities, a point directly linked to improving the business environment and strengthening the legal security of citizens and companies.

The study presented data that demonstrate that, despite initiatives such as the Tax Cooperative Compliance Program (Confia) of the Federal Revenue and Tax Compliance Programs in the States, the rate of taxpayer dissatisfaction with the services provided (Research of the Federal Revenue) in 2021 had an average of 74%.

Read also: Solutions for tax litigation — ETCO Magazine brings contributions from 27 names involved in the subject from different points of view

Alongside this finding, aspects that deserve attention were identified: Provision of taxpayer rights dispersed in various legal provisions and regulations, making it difficult for the taxpayer to understand their guarantees; Imposition of an aggravated fine before the actual proof of possible fraud, with a focus on large taxpayers; Absence of different treatments for taxpayers, occasional, repeated and persistent, in breach of the principle of equity; Expressive percentage of application of tax representation for criminal purposes, whose taxpayer data are published before completion in the administrative sphere; Absence of tax administration performance assessment initiatives through international tools, which were adopted by some of the federated entities, such as the TADAT (Tax Administration Diagnostic Assessment Tool), which identified that we are among the lowest rates of efficient dispute resolution tributaries in the world, among other findings.

At the state level, 12 Brazilian states were identified that adopted the positivization of taxpayer rights and guarantees through codes, in addition to the Federal District: Ceará, Espírito Santo, Goiás, Maranhão, Mato Grosso do Sul, Minas Gerais, Pará, Paraná, Piauí , Rio Grande do Sul, Santa Catarina and São Paulo.

In comparison with the best practices, three countries were evaluated: USA; Germany and Australia. In all of them there are laws aimed at defending the rights of taxpayers, with emphasis in the US for the Taxpayer First Act with a focus on taxpayer service and inspection procedures; Taxpayers Advocate Services (TAS) which, within the scope of the Internal Revenue Service (IRS), is the independent taxpayer defense body; Taxpayer Advocacy Panel (TAP) IRS federal advisory committee that assists in identifying tax issues relevant to the taxpayer; And the express provision of contact with superiors under the terms of item 2 of the Taxpayer Bill of Rights, ensuring the right to a quality service that includes the possibility of contacting superiors of tax agents in case of problems during inspections.

In Australia, as in the USA, taxpayers' rights are recognized through the Taxpayers' Charter, highlighting the following positions: Right to be heard, taxpayers have the right to be heard in the course of the administrative process; The Australian Taxation Office (ATO) undertakes to assist the taxpayer when necessary, explain its manifestations, respond to the taxpayer's requests and promote its effective service and the right of representation before the ATO and even to question the ATO which will explain the procedures possible, in case the taxpayer decides to appeal a decision of the agency, it will seek quick resolution of the problems and will keep the taxpayer informed.

Finally, in Germany, the adoption of the preliminary defense (Anhörung Beteiligter) was identified, in which the taxpayer has the right to a preliminary hearing, which precedes administrative acts that “would impact the rights of the party involved”, and also the hearing at the end of the inspection ( Schlussbesprechung) that takes place after delivery, by the taxpayer, of all documents and information requested by the tax authorities. If the authorities identify any irregularities, the hearing is mandatory.

The aforementioned study demonstrates that we must advance in improving the relationship between the tax authorities and the taxpayer and that legislative measures, such as PL 17/22, instituting general rules regarding the rights, guarantees and duties of the taxpayer should not be considered acts against the tax authorities and agents, but of balance, overcoming ancient quarrels between the Brazilian State and its citizens.

An unlikely government program

The electoral debate, so far, has not been encouraging, due to the scarcity of proposals aimed at overcoming the country's numerous problems. On the contrary, personal rudeness, demagogic or naive propositions, insistent recitation of poorly decorated or insubstantial statistics prevail.

We have accumulated a robust agenda of problems, which this article does not pretend to exhaust. Despite this, I dedicate a few lines to what I believe should be priorities in a government program: eradicating poverty and reforming the State.

Cash transfers to the vulnerable, as has been the case for decades, are indispensable programs. However, it is imperative that they be accompanied by initiatives that imply the social advancement of the poor by converting aid into employment. Without this, there will be the perpetuation of a framework that only takes advantage of populism, in permanent flirtation with authoritarianism.

State reform cannot be confused with proposals that are limited to defining rules for the promotion or hiring of public servants. It has to be something much more ambitious: establishment of a set of parameters of efficiency, sustainability and social responsibility that must be observed; implementation of a national modern management system in public education, health and security and in the prison network; implementation of a permanent program to reduce bureaucracy; restoration of budget order; restructuring of public spending, controlling its evolution; reform of the Judiciary, with emphasis on rationalizing decision-making processes and eliminating procedural pathologies; establishment of remuneration standards for civil servants of all Powers, with the elimination of trinkets, double vacations, special shifts and various indemnities, and with strict observance of the remuneration ceiling; disciplining the State's participation in the management of SOEs and setting objective criteria for privatization.

Confronting poverty and predictable fiscal turmoil will demand extraordinary revenues. Fortunately, it is possible to generate these tax revenues without burdening taxpayers who invest in the real economy, promoting the suppression of privileges for investments in the financial market and in tax havens, the elimination of tax loopholes and the reduction of tax litigation through a daring transaction program.

It is true that this agenda contains complex problems without trivial solutions. But it doesn't hurt to reflect and propose.