Author: Roseli Loturco and Cláudio Gradilone

Source: Season, 18/05/2008

From the moment this report was written until now, when you read it, it is likely that a dozen tax rules were born in Brazil. “On average, tax authorities issued a new rule every seven hours for the past 30 years,” says Igor Nascimento de Souza, from Souza, Schneider and Pugliese Advogados. “Tax law is so complex that no lawyer knows how to respond to a client's tax question on the spot. If I get a call on my cell phone during lunch, my client will have to wait for me to go back to the office and check the law to see if anything has changed. ”

This complexity has two damaging aspects: it reflects an exacerbated greed from local and federal governments about the wealth produced by society and in itself complicates the business environment, entangling companies in bureaucratic norms that hinder their productivity and make their products and services less competitive. The Ministry of Finance itself stated, when disclosing its tax reform project in September, that taxes corresponding to 2% of GDP are lost in double charges in the tangle of tax laws.

In this edition of ÉPOCA Debate we show why this is the main obstacle, today, for Brazil to sustain the economic and social progress that it has presented in recent years. In this report and in the following pages, it is clear that, in addition to being known to be inefficient and unfair, the Brazilian tax system hinders economic growth, prevents the creation of jobs and, due to its structure, makes the authorities have an enormous power to influence in the lives of citizens. We present a diagnosis of the main problems, which can be expected from the government proposal that will go to the plenary session of Congress and how other countries have behaved in relation to the matter.

The complexity of the Brazilian tax problem is no greater than the urgency to resolve it. Proof of this was the package of changes in Brazilian industrial policy announced last week by President Luiz Inácio Lula da Silva, at the headquarters of the National Bank for Economic and Social Development (BNDES), in Rio de Janeiro. The package, dubbed the Productive Development Policy, brought the promise of more credit and tax relief for 25 handpicked areas, with the aim of giving impetus to the productive sector, increasing exports and the pace of economic growth.

The tax waiver contained in the package could reach R $ 21,4 billion by 2011, almost half of what the government failed to collect with the end of the CPMF. Really look like. But it is less than 2,4% of the total of R $ 900 billion in taxes collected last year. Several foreign analysts (who prefer not to have their names mentioned in order not to clash with the Brazilian government) say that this type of initiative is not the most effective to stimulate the economy. The main criticism is the centralized choice of beneficiaries of the tax cut, rather than the equal promotion of opportunities - which would be obtained with, right, a tax reform.

According to studies by a group of economists from the Getúlio Vargas Foundation (FGV) in Rio, which includes former president of the National Telecommunications Agency (Anatel) Luiz Schimura, a tax reform would be much more efficient than an incentive package to promote investments, not to mention the more democratic character of benefiting everyone, not just 25 sectors.

It is a fact that Brazil has survived without reform. Good. In the midst of a global crisis, fueled by the bursting of the bubble in the American mortgage market, Brazil received the investment grade from the risk analysis agency Standard & Poor's - a kind of specialized guarantee for foreign investors to deposit their money here. But S&P itself says there is still a long way to go for the country. And what's missing? "Brazil has to carry out a tax reform, as the current structure affects the competitiveness of companies," says Regina Nunes, director of the agency in Brazil.

Tax reform has been on the table since 1995, when Brazil finally got rid of the terror of inflation. Until then, the government financed itself with a device dubbed the “inflation tax”. People's wages were adjusted month by month, but on the way to the store it devalued. The same was true for companies. The State was left with much of the lost income, with its enviable ability to print currency.

When turning on the light, the Brazilian pays 46% in taxes. In soap, 42%. In beans, 18%

When that was over, government revenue plummeted. To sustain the services provided to society, it was necessary to increase the tax burden. There were two ways to do this: the right thing - rethinking the entire billing system - and the possible way. “The problem with the reform is that Brazil's tax structure is a very complex animal, with what the Constitution calls federative entities, the 27 states and 5.761 municipalities”, says a former member of the federal government who is so tired of fights over the subject, he prefers not to identify himself.

“Some ICMS laws are notepads with thousands of pages of rules and instructions,” he says. “You can't solve everything with what Saddam Hussein would call 'the mother of all reforms'. Then things are being done at the base of the patch, like those buildings in slums, a little pull here, a little walk on the slab there, etc. There is a favela in Rio where the guy is putting one floor on top of the other until it splits. There it stops. It's like that."

While laws were being pulled, at the rate of one every seven hours, the idea of ​​an effective reform never left the Brazilian political agenda. And it gained strength again because of the fiscal war between states. In the dispute to attract investments, they started offering incentives to companies, in the form of tax exemptions. And overall revenue fell. This encouraged the government to present a reform proposal in which the main emphasis is on the ICMS, the Tax on Circulation of Goods (Click here and read the report).

It is a good start, according to that former government official. "For reform, the good is the enemy of the great, and the ideal candidate to start is the ICMS." Less pragmatic, liberal economist Paulo Guedes, a columnist for ÉPOCA, criticizes the cautious approach to the theme. “This reform is limited to building a more efficient system to collect the same current tax burden. The focus of concerns is on government revenue, not on its weight on taxpayers, ”he says (Click here and read Guedes' column).

This burden on taxpayers is at the heart of the tax issue. In a democratic country, the tax system reflects what your society considers important. The choices vary. The priority may be to guarantee the education of the young or the welfare of the old, to ensure the international competitiveness of companies or the military efficiency of the Armed Forces. And every choice has winners and losers.

One of the few consensus is that taxes should tax the rich more than the poor. This is not how it works in Brazil. A study released by the Institute for Applied Economic Research (Ipea) last week showed that here the poorest 10% spend 32% of their income on taxes and contributions. For the richest 10%, the share is 22%. For the extremely poor, the situation is worse: the government takes 44,5% of their income.

"The worst thing is that this taxation is invisible, because the low-income citizen does not know how much tax he is paying," says José Roberto Afonso, a specialist in public accounts and a technical consultant to the PSDB leadership in the Chamber of Deputies. The visible part of taxation for individuals is the Income Tax, which, although imperfect, works in the right direction: whoever earns more pays more. The problem is the taxes that low-income citizens pay without realizing it. These are included in the prices of everyday products.

According to studies by the Brazilian Institute of Tax Planning (IBPT), an organization specialized in the analysis of the tax burden, upon waking up and turning on the light, any Brazilian pays 46% of taxes on his energy bill. When washing your face, 42% of the soap price is imposed. Wiping your face is cheaper: only 36% of the price of the towel. Even with incentives for the basic food basket, taxes “eat” 18% of the price of meat and beans and 35% of pasta. When using the phone, 40% of the bill is tax. When buying TV, 38%. A beer at lunch? Half the bottle is from the government. “Brazil is the world champion in high tax rates on consumption. This takes away the competitiveness of companies, in addition to swallowing the citizen's income ”, says Marcos Catão, professor of Tax Law at FGV.

A country may choose to tax its society heavily to offer many services. This is the case in the European Union, where the tax burden is greater than 40% of the Gross Domestic Product (GDP). That's a lot, but EU countries offer free quality health and education and reasonable pensions to citizens. In the United States, the tax burden is 25,6% of GDP, much less than that of the EU. In contrast, the supply of basic services is lower. “In the Brazilian case, the government taxes as in countries that offer excellent services, but returns little,” says Ricardo Luiz Becker, partner in the tax area at Pinheiro Neto Advogados. Unfair taxes, too many taxes. There is also a third harmful effect of the Brazilian tax structure. It affects competitiveness. This is what the next article shows.

The tax knots

Throughout history, governments have created various forms of taxation. Each has different effects on different parts of the population. High inheritance taxes, for example, undermine a citizen's right to bequeath their wealth to their children, but encourage the wealthiest to invest in foundations and benefits for society. A good tax system is one that can meet society's service demands without strangling economic activity. Not what happens in Brazil

For individuals The most complicated taxes Direct taxes (Income Tax) Indirect taxes (taxes passed on to products) Problem The IR, oddly enough, has lower rates than countries in a similar situation. The difference is that, in other countries, the services provided by the State are better. Indirect taxes and contributions are “invisible” (because they are embedded in the price of the product). They range from 18% in beans to 83% in beer. As all consumers tax equally, they represent a greater burden for the poorest Proposed change None - the IRPF is not even under discussion Transforming contributions into taxes Possibility of approval Nil Small Impact in case of approval ——– ——- In principle, none. But the new system would make the share of prices due to taxation clearer and could lead in the future to greater pressure for tax cuts

For companies The most complicated taxes Taxes on profit (Income Tax) Contributions on billing (PIS, Cofins, Cide) Sales taxes (ICMS) Taxes for small businesses (Simples Nacional and SuperSimples) Problem The IRPJ has high rates in in relation to other countries, which affects the competitiveness of companies and burdens products on the domestic market. The share of revenue taxed by contributions has doubled in the last ten years. These taxes are costly, cumulative (they are levied on other taxes) and generate a great deal of bureaucracy for companies. This is what most hinders companies. As it is statewide, taxpayers face 27 frequently conflicting laws. The war between states to attract investment creates business instability and loss of revenue Has limited application. It unifies taxes and contributions and reduces rates, but it is only applicable to microenterprises (revenues of up to R $ 240 thousand / year) and small businesses (R $ 2,4 million / year). Service companies do not enter the proposed Change program Merger of Social Contribution on Net Profit (CSLL) with the Corporate Income Tax (IRPJ) Transform them - and the Education Salary, which focuses on the payroll - into Federal Value Added Tax, without changing the rates The tax would have national scope and legislation, with five rates defined by the Federal Senate None. The government only suggests “stimulating” the program, without stipulating targets Possibility of approval High High Low Nil Impact in case of approval Reduced. The new system would reduce bureaucracy, but the alteration of rates is not under discussion. The change would reduce bureaucracy, but not taxation, since the Senate wants to keep the amounts collected and the percentages of transferring resources to states and municipalities. Even if the rates remain the same, the change would reduce bureaucracy and make it easier for companies to plan investments ——– ——-

For the up and away

A good indicator of the government's appetite is how much it removes from people and companies, the tax burden in relation to the Gross Domestic Product. In the last ten years, that share has increased from 27,6% to 36,8% of GDP. More: the advance occurred in a period of meager growth. On average, the Brazilian economy has grown 2% per year since the Real Plan, but the tax burden has advanced 6% per year. The effect, for the country, is equivalent to that suffered by a citizen who had a decrease in salary just at the time when the rent on the house increased. This increase has its justifications there. He ultimately ensured that inflation did not return. And, by balancing the country's accounts, it attracted international investments.