Author: Clóvis Panzarini *

Source: The State of S. Paulo - SP - 28/09/2009

The debate on tax reform follows a pendular trajectory: now
dominates newspaper headlines and the concern of taxpayers and authorities
public institutions, placing it as fundamental to unlock the country's economy, now
completely disappears from the agenda, as if all the problems had
mysteriously been solved. The fact is that, in addition to the taxpayer, subject
passive - and put passive on it! - in this truculent relationship, nobody is
seriously willing to take any risk of comprehensive reform,
that breaks paradigms, redistributes tax revenues horizontally and vertically
and, inexorably, political power.

The federal antagonisms and the distrust arising from the imbalances in the
correlation of forces in the National Congress - both with regard to the
representativeness of the federated units regarding the relevant weight and the bovine
obedience of the support base of the current central government - always lead to
calendars any slightly bolder proposition to reform the tax system.
Carry out a proposal for tax reform in a democratic environment, where
involved parties do not have enough strength to shape the model to their
convenience, but they have it to prevent the start of the process, it is virtually a task
impossible.

Recently, at a round table on the tax issue, a scholar on the topic
recalled with sadness that the only two significant tax reforms in the country
in the last hundred years they were made under the aegis of an exceptional political regime. THE
first - implemented by Amendment 18/65 - at the threshold of the military movement of
1964 and which came into force in 1967, revolutionized the Brazilian tax system
with the creation of value added taxes. The second, from 1988, in the
twilight of that regime, when the democratic opening was crawling and the government
had weakened the political support base in Parliament, promoted
wide decentralization of competences and tax revenues, destroying the
Union budget, but leaving it the power to recompose it via creation
cumulative social contributions that transformed the tax system into a
patchwork of bad taste.

Therefore, it is not a trivial task to approve, in a democratic environment, a
proposal for fiscal reform that aims, at the same time, the efficiency of the
taxation, the Federation's balance, the quality of public spending and the reduction
social and regional disparities. Even because these objectives are, many
sometimes conflicting.

The search for efficiency in the tax model, for example,
inexorably due to extensive reform of the Tax on Circulation of Goods and
Services (ICMS), today the main villain of the system and a serious factor
inefficiencies. To give some rationality to this tax there are two
paths, both against the federative balance: one, simpler, the
adoption of the destination principle in interstate operations; and another, more
radical, its federalization.

If the chosen path is the adoption of the destination principle, the change
will imply an important income redistribution among the federated units,
transferring revenue from net exporting states in operations
interstate, for net importers. The most daring, the federalization of
ICMS, as some romantic technicians and hipsters of reality proclaim
politics, will promote redistribution of political power and, probably, of
tax revenue.

State representatives, therefore, suspect, however consistent that
whether from a technical point of view, any reform proposal that changes
the ICMS.

The principle of destiny in interstate operations, which, ending the war
would give some efficiency to the model, displeasing both States
net exporters, revenue losers, as well as importers, who
gain tax revenue but lose the power to make tax policy
regional development with the ICMS.

On the other hand, the federalization of this tax, even though it provides for
distribution of the total proceeds from its collection to the States and
municipalities, is unanimously rejected by the States. These, in addition to not accepting
the loss of political power resulting from the competence to manage it, does not
rely on the correctness of the revenue sharing criterion of the new federalized ICMS,
who will inevitably receive political treatment in Parliament.

It is interesting to note that all tax reform proposals come with
the promise that its outcome will be absolutely neutral from the point of view of
distribution of tax revenues. This shabby and discredited assumption is
false, as it is impossible to eliminate asymmetries from the system with
symmetrical. On the other hand, federated units always require safeguards
constitutional provisions, supplied by the federal budget, to guarantee the
immutability of its share in the national tax pie. Anyway, a reform
in which some federal entities win without others losing
will inevitably result in an increase in the tax burden.

* Clóvis Panzarini, economist, managing partner of CP Consultores Associados
Ltda., Was tax coordinator of the São Paulo Finance Secretariat

Website: www.cpconsultores.com.br