Source: The State of S. Paulo - 29/11/2010

Clóvis Panzarini - The State of S. Paulo

On the eve of the inauguration of the new government, the topic of tax reform is back on the agenda. More than ever, it is urgent, since the deleterious effects of the Brazilian tax asylum on competitiveness are now added to those of the exchange rate war, which is particularly serious for the products with greater added value, which have been losing representativeness in the export basket and inducing a dangerous deindustrialization process.

The Brazilian tax system, complex and inefficient, has its quality persistently deteriorated by the voracity of the Tax Authorities, unconcerned with principles of efficiency. The set of rules that make fiscal management costly and insecure, the taxation of investments and exports and the fiscal war are examples of distortions that compromise the competitiveness of the economy. But the debate on tax reform has been based on false premises that, repeated to exhaustion, become dogmas that distort the diagnosis of the problem. Some of them are considered here:

“The high tax burden compromises the competitiveness of the national productive sector.” It is obviously not the magnitude of the burden that offends competitiveness, but the quality of the taxes that make it up. A neutral tax model, prone to cumulativity, isonically burdens domestic and imported production and allows full exemption from exports. Therefore, it does not change relative prices.

"Tax reform should reduce the unbearable tax burden." Reforming the tax system does not imply reducing the burden, the magnitude of which is defined by the calibration of rates, established by ordinary law. The reform neither reduces the tax burden nor is it necessary to reduce it. In fact, the burden is variable and dependent: without cutting public spending, it is naive to call for a reduction in taxes. By the way, the elected government is already considering the possibility of recreating the CPMF.

"The elimination of some distortions of the ICMS, such as the taxation of capital goods and those of use and consumption, would undermine state finances." States could supply their cash needs through transparent and neutral rates, but they prefer to do so covertly, double-taxing inputs and capital goods. The break in the ICMS debt-credit chain, with the non-refund of the tax paid in the previous stages of the production chain - as with the goods for use and consumption - implies disrespect to the principle of non-cumulative, double taxation and spurious collection. The fact is that government officials do not want to face the political cost of practicing transparent rates. While the ICMS nominal rate is 18%, the effective charge may be 20% "inside" or 25%, if charged transparently, "outside".

"The destination principle will solve the problem of the accumulated ICMS credit, since the States will no longer have to return tax collected by another federated unit." The logic of the ICMS, in force since the institution of the ICM, in 1967, imposes the burden of returning the tax received by the sending State, due to the principle of non-cumulativity, even when it is consumed (transformed). or not) in its territory. Therefore, only the tax levied on the value added in its territory is collected, plus the one corresponding to the difference in the rate, if any. When the exit following the interstate purchase is not taxed, as in the case of exports, the difference in rate is negative. The burden of ICMS credit collected by another State is, of course, due to insufficient production of its own to supply its consumption and exports, and not because they are immune. On the other hand, the principle of destination in interstate transactions with collection at source, as the States want, will aggravate the process of accumulation of credit in untaxed exits - including exports -, since interstate purchases will be taxed at the rate internal.

"The diversity of rates is one of the factors responsible for the complexity of the system." This chant about the diversity of rates - of the ICMS or any other tax - comes, perhaps, from the distant time when the calculation of the tax due required lengthy arithmetic operations. It does not seem credible that the fact that rapadura and piano suffer different incidence of ICMS makes the tax system more complex. Especially because there is reasonable temporal stability in the rates applied. The profusion of rules edited daily (only the State of São Paulo has edited, on average, 33,5 acts per month in the last four years) is certainly much more costly to tax management than the fact that the rates of piano and rapadura be different.

Several other dogmas are accepted without reflection. In fact, the problems of the ICMS stem from the evident conflict between responsibility and tax jurisdiction of the States. While the Union is responsible for the competitiveness of the economy and for the balance of external accounts, the management of ICMS by the States always has a tax bias, albeit at the cost of serious offenses against the neutrality of the tax.