Extending income tax exemption to two minimum wages will have an impact of BRL 16 billion a year, estimates XP – 02/14/2023 – Market

The expansion of the IRPF (Individual Income Tax) exemption range to two minimum wages, as the government of Luiz Inácio Lula da Silva (PT) wants, would have an impact of R$ 16 billion a year, according to calculations by XP Investments obtained by Sheet.

If the measure is adopted from May 2023, the waiver of revenue this year would be R$ 10 billion.

Estimates already consider raising the minimum wage to R$1,320 as of May 1, as has been signaled by the government. The exemption range, therefore, would be equivalent to BRL 2,640 per month.

XP Investimentos economist Tiago Sbardelotto, author of the analysis on the correction of the income tax table, says that the impact of the measure is less than the R$5,000 exemption promised by Lula during the election campaign, but even so, it would be prudent to foresee some kind of compensation.

The Minister of Finance, Fernando Haddad (PT), presented in January a broad package of measures centered on the recovery of revenues, in an attempt to reduce the estimated deficit of R$ 231.5 billion in the Budget. Even so, the estimate of the economic team is that the deficit will be close to R$ 100 billion.

“Given the conditions of public finances, it would be ideal to have compensation, even if small”, he says. In XP’s accounts, the negative result should be R$ 84 billion this year, already with the approval of Haddad’s package.

Today, the exemption range includes remuneration of up to R$ 1,903.98 per month. The Lula government plans to grant a new increase in the minimum wage, to R$1,320 as of May 1, in addition to expanding the IRPF exemption range to two levels.

Sbardelotto’s calculations consider only the correction of the exemption range, without corresponding readjustment in the collection ranges of the other rates of the IR table.

The economist also simulated the effects of Lula’s campaign promise on public accounts. The petista has already said that he “fights” with the party’s economists to “change the logic” of the Income Tax and guarantee exemption to those who earn up to R$ 5,000.

If the exemption range were expanded to remuneration of R$ 5,000 later this year, the impact would be R$ 142.4 billion, calculates XP. This value would be lower, R$ 132 billion, if the deductions did not have the same correction.

The estimate is based on the premise that the other bands would also be adjusted in order to maintain the current distance between them in nominal terms. Today, the difference between the exemption (R$ 1,903.98) and the last bracket (R$ 4,664.68) is R$ 2,760.70, a value that would be maintained in the new table simulated by the economist.

In the accumulated until 2026, when the PT’s mandate ends, the impact of the measure would be R$ 631 billion.

To compensate for the loss, taxpayers who still pay IRPF —about 25% of the current base of workers who pay the tax— would have to pay an effective rate of 45%. Today, the ranges range from 7.5% to 27.5%, and there is a portion to be deducted corresponding to each range.

If a 15% taxation were instituted on profits and dividends distributed to individuals, currently exempt from income tax, the compensation rate would still be 36%.

In case of a gradual correction of the exemption range, reaching the promised BRL 5,000 by the end of the mandate, the accumulated impact would be smaller, of BRL 423 billion.

The simulation considers that the exemption range would rise to R$2,423.76 this year, R$3,085.43 next year and R$3,927.74 in 2025, reaching R$5,000 in 2026. BRL 39 billion this year, gradually increasing to reach BRL 174 billion in the last year of the current mandate.

“In this case, a rate that neutralizes the effects of the loss would rise year after year, reaching 33% in 2026 if there is taxation of profits and dividends, and 44% if not”, states the study.

“We carried out an exercise on how it would be possible to neutralize these effects”, says Sbardelotto. In the scenario of gradual change in the table, the economist lists possible measures to offset the impact, such as a composition between taxing profits and dividends at 15%, restricting deductions for health expenses in the IRPF (today without limit) and reducing the discount margin simplified in the tax adjustment declaration.

Another measure to be included in this menu, says Sbardelotto, would be the creation of an additional rate of 35%, to be levied on the portion of income greater than R$ 8,675 when the exemption reaches R$ 5,000 per month.

The list of measures needed to neutralize the loss of revenue shows how challenging the implementation of Lula’s campaign promise is, evaluates the economist.

“There are restrictions in the real world, mainly political, which end up restricting this change”, he says.