Source: Conjuntura Econômica - RJ - LETTER OF IBRE - 30/09/2009

The Brazilian tax burden rose from 26% of the PIE, in 1995, to 36%, in 2008, following an expansion of the State that was characterized, mainly, by the increase in expenses with the provision of services and by the expansion of the social transfer system. That increase in taxes as a proportion of the PIE is usually described, in the academic debate and in the mainstream media, as a negative point of economic evolution in Brazil, for reducing incentives to work and saving the economy - hence, growth.

However, this criticism may not be the most adequate to understand the reality and induce the proposition of more correct choices ahead, since it omits central aspects of this reality. It is important to note that the extension of the State did not happen in a vacuum, but was part of a historical process of socio-political choices by society based on redemocratization. This means that there is a counterpart to the increase in taxes, which is the expansion of a huge system of social transfers and the expansion of public services such as Health and Education. Evidently, it is necessary to measure the efficiency with which these expenses were implemented and increased. Thereafter, a more careful cost-benefit analysis of the state's presence in the economy could be promoted.

The redistributive role of the State

The economic literature has contributed towards identifying what leads a country to work with a higher tax burden. French economist Roland Bénabou, for example, in his work entitled "Inequality, Technology and the Social Contract", seeks to unravel the relationship between equity and the size of the state. Simply put, Bénabou suggests that the degree of distributiveness of a country's fiscal policy is high in very egalitarian societies, decreases as income distribution worsens, and grows again when inequality takes on very significant proportions.

In an egalitarian society, in which the population is homogeneous in terms of educational preparation and in terms of income, citizens tend to view taxes and public expenditure as if they were an insurance system, which supports those who are unfortunate enough to incur very unfavorable situations. In these countries, therefore, the egalitarianism of the socio-economic structure tends to be maintained and reinforced by State mediation. It is very important to note, however, that there is not a real redistributive action of the system of taxes and public spending, since this is not a massive transfer from the richest to the poorest - most transfers occur between people with a social profile. - relatively close economic, according to the “insurance” logic previously described.

In more unequal societies, high-income groups feel that they pay more taxes than the value of the public goods they consume. They are also the most capable of influencing the decisions of the political system, in order to avoid fiscal distributivism. In this way, the richest are successfully opposed to increases in the tax burden to finance the expansion of the Welfare State, which tends to perpetuate inequality. Along these lines, a work by Bartels -, from 2002, reinforces this understanding when observing that the richer the voters are, the more the votes of American senators serve their interests.
A third situation is that which occurs when the distribution of income reaches “unfair” levels. In such cases, the mass of those in favor of redistribution grows so much that it can become politically stronger than that of the rich. The trend, therefore, is to increase the tax burden to finance services and programs that transfer income from the richest to the poorest.

The improvement in income distribution in Brazil, verified over the last 20 years, is good news, but it is certain that we are not yet at that optimum point corresponding to egalitarian societies with high taxation and large public spending, in which the electorate supports the action by a heavy state that works more as an insurer than as a redistribution agent. This is clear in a work by the World Bank (2006), in which, in a sample of 126 countries, Brazil was the one that presented, in terms of income distribution, the 1163 position - in other words, only ten countries in the sample had an income worse distributed than that of Brazil. Because of this, the situation in Brazil would tend to be framed in the third case mentioned above - a country where inequality is such that even the traditional prevalence of the interests of the richest can no longer prevent the State from pursuing redistributive policies based on high taxation and increased public spending.

However, the Brazilian formula for redistribution is based on heavy income transfers that, only marginally, in the case of Bolsa Família, are well focused on the poorest and linked to the reduction of educational inequality. An emblematic case of redistributivism that leads to a worsening of income distribution, already dealt with in the Ibre Charter of April 2008, is the Brazilian expenditure on the payment of benefits in the death pension program, which in 2006 reached the mark of 3,2, 0,2% of the PIE. The number is, in fact, high when compared internationally. In an expressive sample of nations, it is observed that countries whose proportion of people aged to enter inactivity is similar to that of Brazil bear an expense related to the pension account in the range of 0,8% of PIE - which gives an idea the peculiarity of the Brazilian case. An even more impressive indication, if we evaluate what happens in the average of the majority rich countries of the Organization for Economic Cooperation and Development (OECD), is to observe that the pension expenditure of that group, almost all rich, is of the order of XNUMX % of PIE.

Another fact that calls into question the efficiency of the redistributive role of the Brazilian State is the evidence that the increase in the tax burden was regressive on the tax side. According to the study Simplifying Brazil, ”by Zockun et alli, from 2005, the weight of direct and indirect taxes on the income of families with incomes of up to two minimum wages jumped from 28,2% in 1996 to 48,8%, in 2004, with an increase of 20,6 percentage points. In contrast, in households with an income of more than 30 minimum wages, the weight of taxation rose in the same period from 17,9% of income to 26,3% - a substantial increase of 8,4 percentage points, but which represents less than half of what happened to families at the bottom of the social pyramid. Zockun's work points out that the increase in percentage points of the tax burden between 1996 and 2004 has an almost uniform tendency to decrease with income, and that this is fundamentally due to the large increase in indirect taxes.

Background

In fact, in discussions of this nature, it is always useful to revisit studies on the role of institutions - in this case, focusing on the size and quality of State action - in development, such as those conducted by innovators of economic thought such as awards Nobel Douglass North and Ronald Coase.

A result pointed out in studies on the role of institutions in development is that there are no ready and finished models, which are applicable to all countries. Djankov et alli, in 2003, and Rodrik, in 2008, suggest that the type of institution that works in developed countries is not necessarily the best choice for developing countries. An example of great historical impact is the transition to capitalism in Russia and in several countries of the old "Iron Curtain". In the Russian case, the most emblematic, Western consultants were behind the sudden change in the institutional environment, with generalized privatizations and in a short time, and the attempt to create a new class of entrepreneurs overnight. The result was that state-owned companies passed into the hands of an oligarchy, which seriously damaged the prestige of capitalist institutions in the country, and led to a return to a more statist and authoritarian model. In contrast, the transition to capitalism in China is proceeding at a much slower pace, with incremental changes in the institutional environment inherited from the socialist past. A period of 30 years of growth at an average rate of 9% per year suggests the success of China's gradual list strategy - moreover, conducted with an iron fist by the State.

Thus, the pure and simple transplantation of institutions does not necessarily result in the planned social improvement. Easterly, in a 2009 article, indicates that institutions are not only built from above, but are the result of social norms, customs, society's values ​​and even the country's level of development. And Dixit, in 2009, defends that in order to propose changes, it is necessary, first, to understand the reason for the existence of that institution that one wants to change in order to then evaluate the implications of the planned change.

Possible paths

In the debate on the Brazilian tax burden, the institutional view, taking into account all national specificities, is fundamental. Our redistributivist state, as seen above, has several distortions, but they did not arise out of nowhere. In fact, the institutional fabric derives from the historical process, in which an infinity of interests, ideas, programs and negotiations intertwine to shape the solutions of each country. This result may not be ideal and, as in the case of Brazil, it may even harbor evident absurdities (such as pensions). But it is always linked to the modus operandi of each society and to agreements between social actors, in subtle ways that are not always visible to "scientists" with ready and finished solutions.

Thus, more than thinking about a reform from top to bottom of the Brazilian State, or reversing the process of its expansion in the wake of the increase in the tax burden, a wiser line of action would be to seek incremental changes. These new steps should start from what already exists and seek to disseminate advances that have already happened in the sector, or that naturally present themselves as the “next stage” of our institutional evolution. In this context, three lines of action could be listed to improve the Brazilian tax system.

In a first action front, it would be possible to institute mechanisms that eliminate, or at least significantly reduce, the lack of transparency in the discrimination of taxes that are actually paid by the population. It is important to give a clearer view of the disbursements that each one makes to finance the different programs of the State. One possibility would be to include in the invoices the tax actually paid by the consumer - which, in fact, is already practiced in many countries. Thus, when making a purchase in a store or in a restaurant, the typical Brazilian would have the exact measure of how much he is paying in taxes. The important thing is that the population perceives, in a simple and transparent way, the taxes it pays, and to demonstrate democratically on this issue when it comes to electing its representatives. In fact, a model of democracy like the Brazilian cannot do without such transparency.

A second step would apply to the redistributive system of the Brazilian State. In the transfer policy, one of the most important institutional advances achieved in recent years was the ability to reach the poorest sections of society in a focused and large scale. The program that makes use of that technology, Bolsa-Família, serves a universe of about 12 million families at a cost of approximately 0,4% of the PIE.

It cannot be forgotten that some of the programs implemented before Bolsa Família, and which are still in operation, had the specific objective of reaching the poorest. An example is the rural retirement program. At the time, it was believed - which, in fact, was proven in practice - that, when contemplating the elderly in the countryside, it would be possible to transfer income also, indirectly, to the unassisted youth. As a result, the pension benefits for the elderly in the countryside became the main source of income for families in many of the country's pockets of poverty.

Although the solution for rural retirement was important, it is clear that Bolsa Família is far superior in the redistributive focus, when thinking about the poor population beyond old age. After all, the money that goes directly to poor mothers with children at school seems a better scheme than they depend on the goodwill of the elderly in the family (if there are elderly in that specific family). Thus, would it not be the time to review programs that would focus on the population of the least favored and that do not use the Bolsa Família registration? It is clear that rural retirement would continue to exist, but with the conceptual clarity that it is a benefit for the elderly, and that there are more efficient ways of supporting young members of the families of these elderly people. The institutional advance, in this case, would be to realize that perhaps it does not make more sense than the State, having the technology to reach the most needy population, sanction new social programs whose contemplated are not included in the Bolsa-Família register.

Finally, a third possibility of incremental change is linked to the remuneration policy for civil servants. In the federal public budget, expenditure on civil servants was 3,1% of the PIE, in 1995, and in 2008, it is close to the rate of 5% of the PIE.8 Seen in isolation, these values ​​are not very significant. One way of putting it into context would be to introduce the aspect of the quantity and quality of services provided. Although the view of higher income strata is that Health and Education in Brazil, for example, are very poor, these services are best rated by the poor and the lower middle class who actually use them. This does not mean that the result should be celebrated, but it does reveal that the question of evaluating the public service, vis-à-vis the increase in spending, is more complex than it seems at first.

Still, this is an area where progress can be made. Today, there is no clarity on what are the parameters and guidelines that guide the evolution of civil service wages. As Douglass North has pointed out, a good institution is not one that corresponds to some perfect model, but one that proves useful for each specific society - or, in his own words, “the main role of institutions in a society is to reduce uncertainties, through the introduction of a stable (but not necessarily efficient) structure for human interaction ”. A healthy way to provide transparency and predictability to the civil service wage policy, which would have won immediately, is to seek to bring it in line with that of the private sector. It would be a way of reducing uncertainties from side to side: both the citizen-taxpayer would be more relaxed, having a clearer view of the policy that would govern the readjustments of the public sector, as the civil servants would see in a positive way a change by which they he would need to rely more on the goodwill of the current ruler to guarantee his fair remuneration.
The suggestions for improving this Charter do not represent any revolution, nor could they even be characterized as a “management shock”. In fact, they are contributions, in the form of sketches of ideas, that seek to add new bricks to the existing institutional architecture. The purpose is to introduce greater transparency and rationality in the functioning of the Brazilian State.