Source: Diário de Sorocaba, 09/12/2008

From the mid-90s, what has been called the “flat-tax revolution” began in the world. Several Eastern European countries have been implementing significant changes in their tax systems. Tax unification was adopted in 1994 by Estonia, which created a 26% income tax rate to replace four taxes. Then, Lithuania, Latvia, Russia, Serbia, Ukraine, Slovakia, Georgia and Romania followed the same guideline.

The tax simplification of Eastern Europe is an example that has aroused interest worldwide. Driving simplification to its logical consequence, unifying taxes on a single real basis, would require identifying a broad base to allow modest marginal rates to avoid evasion and evasion.

From the 80s onwards, it became evident that the broadest possible base is the cash flow. In Brazil, with the wide and sophisticated computerization of the banking system and the predominance of book currency over manual currency, it is easy to conclude that the non-declaratory basis of financial transactions would be the most adequate to implement a simplified, cheap and immune to hiding system economic. An authentic tax reform should combine the simplifying boldness of Eastern European experiences with the technical efficiency of the extinct Brazilian CPMF model. However, the predominant trend is the adoption of traditional bases such as income, profit and added value.

The Brazilian government also joined the simplifying wave, but remained stuck in a conservative perspective when opting for the unification of taxes on declaratory bases: the CSLL and the IRPJ would be unified and charged on the companies' income and the PIS / Cofins, Cide and Education Salary would be extinguished to create a federal VAT.

PEC 233/08, which the government says will be voted on this year, simplifies the system a little, but does not solve the critical problem of tax evasion, because a high rate would be applied on a declaratory basis. To give you an idea, in the case of federal VAT, its rate plus that of the ICMS would require a charge of around 22% on the added value. It is evident that, as evasion varies in direct proportion to the nominal tax rate, there will be a great incentive to evade, which will aggravate the problems of the current tax system.

In Brazil, the pattern of tax incidence is chaotic, unpredictable and devastating, to the point that it can break an efficient company that pays taxes and make an inefficient one survive, which evades and plunders its competitors. The extinct CPMF was the only tax species capable of neutralizing this anomaly. In general, the cost of evasion ends up exceeding the tax economy itself. This is the advantage of a non-declaratory tax, which, because it is insurmountable, allows low, but universal rates.

Unfortunately, Brazil will spend another year without promoting a tax reform that will effectively rationalize its chaotic tax structure. PEC 233/08 is correct in proposing simplification, but it is wrong to maintain a system of declaratory basis, because tax evasion would continue to be stimulated and the employee would continue to bear a high burden to compensate for this situation.