Author: MARCOS CINTRA

Source: Gazeta Mercantil, 05/05/2009

May 5, 2009 - Brazil taxes excess wages and payroll. Taxes on the remuneration paid by companies limit the country's competitive capacity, reduce the supply of jobs and encourage the maintenance of a high contingent of informal labor.

The heavy burden on the payroll has been debated for years, but it has never been placed on the agenda as a priority for change. In the tax reform proposal that is currently being processed in the National Congress (PEC 233/08), there is a timid reduction of 1 percentage point per year in the 20% of employers' social security (up to 14%) that would not have a significant effect on the over-taxation of this tax. base. Furthermore, there is no relief from the tax burden on wage earners.

The government, union centers and businessmen recently tried to tie up an agreement to avoid further layoffs. The idea was for companies to reduce their working hours by up to 20% without cutting wages. To compensate, there would be a temporary decrease of about 40% in the 20% paid by companies to the INSS, in contributions to the “S” system and in the 8% paid to the FGTS. The government's proposal for exemption from payroll in exchange for maintaining jobs has not encouraged the union centrals and, it seems, has been left out.

Relieving payroll charges should be a measure of

permanent and wide-ranging character that makes companies competitive, creates jobs and combats job insecurity. The proposal that the government presented is a temporary improvisation of limited scope in view of the magnitude of the problem.

Replacing the sources of social security resources from wages is an urgent demand in society. However, the alternative tax base that has been suggested, such as billing or added value, does not relieve the productive sector, does not combat tax evasion and does not reduce costs.

Social security charges must be borne by society as a whole. They should not be supported primarily by the productive sector, as is the case today with contributions to the payroll (and would continue to occur if the base were replaced for added value or billing). The 1988 Charter incorporated this concept by defining, according to the caput of article 195, that the costing of the social security system is the responsibility of “the whole society, directly and indirectly”.

In this sense, it is necessary to replace the contributions levied on the payroll by a contribution on financial transactions. This alternative simplifies the system, combats tax evasion, reduces business costs and guarantees a stable income for the INSS.

A broad alternative that the government, unions, business and political entities could begin to discuss is the almost total elimination of corporate payroll taxes, with only FGTS remaining. The idea would be the extinction of the 20% for the INSS, the 2,5% of the education salary, the entire “S” system and the occupational accident insurance. To replace the collection of R $ 73 billion that they generate, a contribution of 0,33% would be created on the debits and credits of each bank entry. It is important to emphasize that the contributions to the parastatal entities (Sesi, Senai, Sesc, Senac, etc.) and to the FNDE would have modifications only with regard to the sources of collection, with the current sharing criteria remaining.

The revenue generated by financial transactions is more stable than that on payroll, which, in times of crisis such as the current one, fluctuates abruptly and intensely.

A study by the Getulio Vargas Foundation reveals that the replacement of the employer's INSS by a rate of 0,5% on debits posted to current bank accounts would reduce the tax burden on the value added by companies. GDP could have an additional growth of 1,6% and the level of employment, of 1,9%.

The imposition of a financial transaction tax to replace corporate payroll taxes is an alternative that would benefit public and private agents. Companies would have a reduction in their costs, the supply of jobs would grow, work with a formal contract would increase and the government would not only maintain the collection, but also the cost of inspection would be lower.

kicker: Social charges should be borne by the whole society

(Gazeta Mercantil / Caderno A - Page 3) MARCOS CINTRA * - Full professor and vice president of Fundação Getulio Vargas. Next article by the author on June 4)