Author: Marcos Cintra

Source: Diário da Manhã - GO, 01/07/2009

Critics of cumulative taxes say this is the biggest problem in the Single Tax proposal and argue that the basis for a tax reform should be the creation of a Value Added Tax - VAT, as it is a neutral and efficient tax. This is a speech that many tax experts and economists often repeat, without ever having looked at the topic to analyze it critically. It has become a myth in the tax literature to claim that VAT is more efficient than a cumulative tax.

First, it should be noted that no tax species is totally neutral. Both cumulative taxes and VATs distort relative prices and alter the economic decisions that would have been taken in the absence of the tax wedge.

The question that must be asked in the assessment of a tax system concerns the analysis of the distortion that a cumulative tax causes in prices, compared to what occurs with VAT. Which of the two tax species has the most impact on prices?

The comparison of the impact on prices between the two systems can be obtained from the interindustrial matrix calculated by the IBGE for 110 products. If a Single Tax on Financial Transactions were adopted to replace three VATs (ICMS, IPI and employer's INSS), it should have a rate of 1,05% on the debit and credit of transactions in bank current accounts.

The simulation result for the 110 products shows that the Single Tax would have an impact of at least 3,7%, on the value of real estate services, and a maximum of 8% on the price of gasoline. VATs (ICMS, IPI and INSS) would have a distortive effect of at least 17,4% on the prices of services provided to companies, and at most 57,9%, on tobacco products.

Therefore, cumulativity cannot be considered as an undesirable feature of the Single Tax proposal, since the distortions in relative prices are much less than those caused by taxes such as VAT. The analysis based on the intersectoral matrix demystifies the idea that VAT is more efficient than cumulative tax.

In addition, it should be noted that the tax on financial transactions eliminates tax evasion, reduces the operating cost of the system and expands the tax base. In this sense, everything indicates that, under the specific conditions of Brazilian society, a cumulative tax without tax evasion and with a low rate is preferable to a VAT with tax evasion with high rates.

It should be noted that the criticisms of cumulative taxes have lost strength due to a successful experience adopted in Brazil. Between 1993 and 2007, the country lived with a tax levied on financial transactions, the CPMF (initially called IPMF), which did not cause any distortion in relative prices, thereby denying what advocates of VAT advocate.

Marcos Cintra holds a PhD in Economics from Harvard University (USA), full professor and vice president of Fundação Getulio Vargas.