André Franco Montoro Filho: Unconstitutionalized tax reform


Author: André Franco Montoro Filho

Source: Folha de S. Paulo, 03/03/2009

IN BRAZIL, there is almost unanimity on the need for tax reform. Despite this, countless attempts at reform have been unsuccessful. As everyone is in favor of such a change, but it does not happen, I remembered Nelson Rodrigues' famous phrase: “Every unanimity is stupid”. It seems that unanimity is only the result of a pro-reform will, politically correct, but undefined.


This support lasts as long as the uncertainty remains. Just start specifying the content of the changes for disagreements to flourish and new claims to thrive. That's when reform is stalled.


So are we doomed to not have retirement? As long as we continue to dream of a broad constitutional reform that solves all tax problems, the result will be frustrating. Fortunately, effective progress can be made with approaches focused on specific problems. It is necessary to check what is wrong and see if the correction requires a change in the Constitution. Let us analyze the main criticisms that are made of the Brazilian tax system.


1) High tax burden: this is the biggest complaint from the private sector. But it is not constitutional matter. The total amount of taxes paid depends on their rates - which are set by means of infra-constitutional legislation and not by the Constitution.


2) Regressiveness of the tax system: some studies indicate that the Brazilian tax system is unfair because proportionately the poorest pay more taxes than the richest. Indirect consumption taxes - for example, the ICMS - are regressive because the rates are the same for all buyers. As the richest, by saving part of their earnings, consume a smaller share of their income in relation to the poorest, it is clear that, when it comes to income, the richest pay less taxes.


To correct this deficiency, a change in the Constitution is not necessary. It would be enough to change the income tax legislation to make it more progressive. In addition, the Constitution states that the ICMS “may be selective, due to its essentiality”. Taxation with minimum rates of basic basket goods would already give ICMS some progress. The correction of the eventual regressiveness of the Brazilian tax system does not require a constitutional change. Amendments to the Income Tax and ICMS legislation are enough.


3) Tax war: the current Constitution establishes that the complementary law "regulates the way ... tax incentives and benefits will be granted and revoked". And the legislation has already regulated the matter. The problem is that it is not being obeyed. An eventual change in the Constitution - banning what is already prohibited - would have an enormous probability of having the same fate: not being obeyed.
A proposal to end the fiscal war is to establish that the tax is due in the State of destination (consumption) of the goods and not in that of origin (production). What defines how much of the collection is in the producing state and how much goes to the consumer is the interstate rate. With zero rate, the entire collection belongs to the State of destination. With this collection system, the fiscal war of attracting companies through ICMS exemptions ends with a lack of ammunition. Now, there is no need for constitutional reform. The Constitution provides that the fixing of interstate rates is made by a Senate resolution. Just use this prerogative.


4) Complexity of the Brazilian tax system: the complexity of paying taxes in Brazil is enormous. Studies indicate that the amount of hours spent to pay taxes in Brazil is the highest in the world. This complexity, however, does not derive from the constitutional design, but from a constantly changing tangle of laws, norms and interpretations.


It is the result of the variability and ambiguity of the infraconstitutional legislation, the numerous accessory obligations, the conflicting interpretations and other factors that are not considered constitutional matters. There is another issue that is constitutional. It refers to the distribution of taxes between the Union, the States and the municipalities. But this is more a discussion of federative pact than of tax reform.


The root of the tax problems is not in the Constitution. There is no point in reforming it if the chaotic infra-constitutional legislation continues to change. The pressing tax reform needs to change its focus. It is not the Constitution that must be reformed. It is the tax legislation that must be improved.


ANDRÉ FRANCO MONTORO FILHO, doctor of economics from Yale University (USA), is a professor at FEA-USP and president of the Brazilian Institute of Ethics in Competition - ETCO.


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