The risks of tax reform
Author: Emerson Kapaz *
Source: Valor Econômico, 01/11/2007
It is commonplace to state that the Brazilian tax burden,
around 40% of GDP, has no parallel in the world. This explains the environment
of enthusiasm that now takes shape with the concrete possibility of approving
tax reform, after more than a decade of advances and setbacks, changes
occasional increases in some rates and collection records. Yet,
when you look more closely at what can really happen, it’s clear that,
as an old saying goes, the amendment can get worse than the sonnet. Or
that is, there is a risk of making the system even more confusing than it already is, including
with tax increases.
The fundamental idea behind the reform is simple and practical: the weight
taxes should be reduced and the taxpayer base broadened, creating the
lasting foundation for sustained economic growth. Does that exist,
in fact, asymmetry between the concept and the practical reality that is beginning to
outline? Before going to the heart of the matter, it is advisable, to facilitate the
understanding, make some considerations, focusing on the burning conflict
distributive, either within the scope of the federal government with the States, the
with the poor states, and between the different segments of the production chain.
Were it different, there would not be such a multiplicity of reform proposals
involving segments of industry, commerce, the financial system, tax authorities and
economists. Each with a particular concept of the way to go, as if
it was a puzzle in which the pieces do not fit.
In this context, we must not forget that some changes have already been
introduced in the tax area. Since December 2003, after approval of the
constitutional amendment 42, the Super Simples, the Untying of
Federal Revenue, the extension of the CPMF until the end of 2007, extension of the
Manaus Free Trade Zone until 2023, article 146 on tax deviations
competitive factors, in addition to the non-cumulative nature of social and
incidence of social contributions on gross revenue or revenue.
The result that these changes caused can be seen from a
greater growth in the economy, allowing greater control over tax evasion,
a decrease in informality and records and collection.
Going back to today, we have the tax reform project underway
known as the “Bernard Appy proposal”, which brings as a background the
possibility of simplifying and merging various taxes. This proposal can
summarized in the following points: 1) creation of a Federal VAT, as a result of the merger
IPI, PIS, Cofins and Cide - Combustíveis; 2) creation of a State VAT
(dual model): national VAT legislation, reduction in the number of rates and
fate principle; 3) creation of an IVV (Retail Sales Tax)
These measures, it must be considered, will be implemented in parallel with a
set of rules and laws that has worked for decades, full of defects, is
true, but that allows the government to beat successive collection records.
It will also face a fierce reaction from interest groups already established in the
state governments and private initiative, and who will not stop fighting for
keep them. Thus, it is reasonable to believe that this confrontation may result in
consequences such as: 1) extinction of IPI: repercussions on transfers
federal, constitutional funds and Manaus Free Trade Zone; 2) Dual VAT: conflict
competence in federal administration with states; 3) uniform rates in the
Federal VAT: dramatic increase in the tax burden of less taxed sectors
(trade and services); 4) extinction of simplified systems (ISS, Pis / Cofins,
Simple): greater complexity, greater evasion; 5) return to tax evasion
fuels; 6) restriction on the use of anti-evasion institutes, such as
ad-rem rates, tax substitution and single-phase incidence; 7) creation of
IVV, with high evasion potential; 8) does not resolve the issue of the accumulation of
export credits; 9) establishes cumulative operations
interstate, due to the impossibility of communication between federal credits and
You should not run the risk of changing a system that has defects but
works for a much worse one, which is not known if it will work
In addition, there is the inevitable increase in taxation when the merger of
different rates of ICMS currently existing in the different States, and the natural
tendency to make the adjustment from the top, and not from the average, thus guaranteeing
revenue for state governments.
What to do? How to overcome such risks?
We first need to convince class entities in the productive sector,
and associations representing the most varied segments of civil society,
to come together in this debate, in order to avoid the known consequences that
will lead to more taxation, especially for sectors that already pay
From this union of efforts we can deepen a set of changes
feasible, gradual measures that improve the system in force, preventing the
of any rate currently in existence, reducing and eliminating taxes
existing, and that will be of interest to the whole society.
Initiate a public, high-level discussion on how to restructure the
government spending, and, from there, adjust the tax burden to the new levels
spending, rationalizing and simplifying the current system, mainly in the
area of charges on corporate payroll.
It is not an easy path, but we will not risk changing a system that
has defects and works, on the other hand, much worse, and we don't even know if it will
* Emerson Kapaz is an entrepreneur, president of ALEK-Consultoria Empresarial
and strategic consultant at IDV-Institute for the Development of the
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