Income Tax: Changes increase inequality – 03/09/2023 – Market

The main alternatives under study for changes in the Income Tax table should impose revenue losses on the federal government. Without mitigation mechanisms, they can also increase income inequality in the country.

A study by the Research Center for the Macroeconomics of Inequalities (Made), at the University of São Paulo, considered the three main hypotheses recently discussed for the IR and its effects on revenue and the Gini index —a measure of inequality from 0 to 1; where the closer to 1, the more unequal.

The government’s current proposal to increase the monthly exemption range to R$2,112.00, allowing a simplified deduction of R$568.00 (which would be equivalent to a range of up to two minimum wages), would lead to a loss of revenue of R$ 4 billion.

If the option were to correct the table for accumulated inflation, increasing the exemption range to R$ 2,773.36, the loss would jump to R$ 45.9 billion.

During the election campaign, President Lula had promised to exempt from income tax income up to R$5,000, and there is a congressional bill (PL 2,140/22) that raises the exemption range to R$5,200. In this case, the loss of revenue would reach R$ 90 billion.

In all three hypotheses, there would be an increase in the Gini index, since IR taxpayers in the country are usually richer —in Brazil, around 40% of those employed are informal. Thus, any increase in the exemption range ends up benefiting the richest.

In this year’s declaration, based on 2022, income up to R$ 1,903.98 is exempt.

As an exercise to mitigate the effects of the loss of revenue and the increase in inequality, Made simulated hypotheses in which the Federal Revenue would adopt a 35% rate on the richest 1% in the country and another of 15% on profits and dividends from physical person.

Applied to the first two proposals, the rates would increase revenue by R$42 billion and R$102.9 million, respectively. In the case of exemptions of up to BRL 5,200, the rates would be insufficient to reverse the negative effect of the reform on tax revenues — even so, there would be a loss of BRL 46.3 billion.

Made points out that just adding a 35% rate for the richest 1% (without tax on profits and dividends) it is not possible to mitigate the negative effect on revenue in any of the proposals.

According to planning by the Ministry of Finance, the government should resume discussions on the reform of the IR in the second half of the year – after trying to approve the tax reform in these first months of 2023.

Another work by USP, from the Center for Metropolis Studies, recently showed that, between 1989 and 2020, parliamentarians proposed or analyzed 4,841 bills, provisional measures or proposed amendments to the Constitution in the tax area.

Only 5% (247) of the propositions were progressive, in the sense of taxing the richest strata or relieving the poorest (as in the exemption for basic basket products). Thus, most of the measures were also aimed at increasing income inequality.