Author: Marcos Cintra *

Source: Gazeta Mercantil, 05/09/2007

Social charges for companies are around 17% of the tax burden. At a recent meeting of the Government's Political Council, convened to present the proposed tax reform, leaders and presidents of allied parties suggested tax measures with immediate effect as a way to compensate society for the decision to extend the CPMF. The main point of the discussion was the need to exempt companies' payroll, starting with the 20% of the employer's contribution to the INSS.

The Political Council approached the problem of the high tax burden on the payroll of companies in Brazil. This is the second most heavily burdened tax base, which negatively impacts the competitiveness of national production and the formalization of jobs. Social charges on companies' payroll represent around 17% of the tax burden, second only to taxes on production.
 

Employer's expenses with INSS, FGTS, education wages, occupational accident insurance and the 'S' System represent around 36% of the wages paid to workers in Brazil. According to José Pastore, from USP, the inclusion in these charges of costs related to unworked time (vacation, 13 salary, prior notice, etc.) causes the expense of hiring an employee to exceed 100% of the nominal salary. According to him, in England this expenditure is 59%, in Italy 51% and in the countries known as Asian tigers the average is 11%.
 

The problem of the high burden of payroll taxes is proving to be dramatic due to the great differential between labor costs in the Brazilian economy compared to other emerging countries, especially when the benchmark is China, an economy where , according to the National Confederation of Industry, an employee costs companies almost half of what in Brazil.
 

As labor tax costs are high, the solution is informality. On the other hand, an official without a formal contract means to the government that compensatory taxes will have to be extracted from other taxpayers in order not to compromise the public budget balance.
 

To get an idea of ​​the dimension of informal work in the country, the IBGE's PNAD shows that 63% of the economically active population are employed (the remainder refer to employers, self-employed and unpaid workers) and, from this contingent, 37% do not have a formal contract.
 

The need to relieve the payroll is becoming unanimous in the country. Entrepreneurs, politicians and union members have manifested themselves in this regard. However, the alternative tax base that has been suggested, a new contribution on sales, does not solve the problem of companies' competitiveness and informality.
 

Exchanging the 20% employer's contribution to the INSS for a contribution on gross revenue will impose a higher cost on this tax base, which is already heavily taxed, and makes the system even more complex, expensive and inducing tax evasion.
 

Social security charges must be borne by society as a whole. It 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 billing).
 

The viable alternative basis for the payroll tax exemption is the financial movement. It is the only form of collection that simplifies the system, since it makes the presentation of guides and declarations unnecessary; combating tax evasion, as it is not possible to hide the tax base as with billing; and reduces the business cost, both in terms of tax disbursement and in relation to administrative expenses.
 

A recent study by Fundação Getulio Vargas (FGV), based on the new methodology of national accounts promoted by IBGE, reveals that the replacement of the employer's INSS by an additional 0,5% at CPMF would reduce the companies' production cost. GDP would have an additional growth of 1,1%, the level of employment would increase by 1% and total demand would increase by 1,2%. In other words, the reduction of more than half of the social charges collected on the payroll and its replacement by an increase in the CPMF would have a positive impact on the labor market, consumption and business activity.
 

The financial movement as a base of tax incidence revealed qualities with the CPMF experience. When this contribution is compared with the other taxes on billing, profit or payroll, it is advantageous in terms of cost and simplicity.
 

Strangely, it tries to show to the public opinion that the CPMF is the villain of the Brazilian tax system, when the real targets of criticism should be the expensive and withholdable taxes such as Cofins, INSS and ICMS, for example. However, it should be seen as an embryo for the rationalization of the chaotic tax structure and the starting point would be its use as a way to alleviate costs for the productive sector and to formalize and generate jobs.
 

* Marcos Cintra - PhD in Economics from Harvard University (USA), full professor and vice president of Fundação Getulio Vargas (FGV)