Income Tax Exemption Causes Controversy in the Lula Government

The update of the Individual Income Tax (IRPF) table, with exemption for those who earn up to R$ 5,000 a month, was one of the proposals announced by Luiz Inácio Lula da Silva (PT) in the campaign for the Presidency in 2022. the promise, the government now indicates that it is not in a hurry to implement the change. The last update of the tax rate bands completes eight years in April.

Shortly after the PT’s victory in the election, still in November 2022, the elected senator and current Minister of Social Development, Wellington Dias (PT), indicated that the changes might not occur in 2023. “It is a proposal for the mandate. She is not being treated even in the PEC [da Transição] nor in the reorganization of the Budget [de 2023]”, he stressed at the time.

The justification given by the Minister of Finance, Fernando Haddad, at the beginning of the year, is that updating the table could only come into force from 2024 onwards to comply with the principle of precedence, which establishes a minimum period for the entry into force of changes in the taxation.

The argument, however, is only partially valid. “The rule says the following: the State cannot institute or increase taxes without this being foreseen in the previous fiscal year and 90 days before the entry into force. In the case of Income Tax, the previous fiscal year applies”, explains tax lawyer Guilherme Peloso Araújo, partner at Carvalho Borges Araújo Advogados.

“But the rule concerns the institution or increase, which would not be the case. If there was political interest, there is the possibility of having this reduction already for the Income Tax that we will pay between March and April”, he says.

At the World Economic Forum, in Davos, Switzerland, Haddad announced that he intends to submit to Congress, in the second half of the year, a proposal for reforming the Income Tax to “encumber those who currently do not pay taxes”, which could be done with the taxation of currently exempt income, such as profits and dividends.

“In the second half of the year, we want to vote on a tax reform on income to relieve the poorest strata of taxes and burden those who currently do not pay taxes. Many people in Brazil do not pay tax. We are going to rebalance the Brazilian tax system to improve income distribution in Brazil”, said the minister.

Revenue should raise BRL 328.6 billion with IRPF in 2023

The biggest obstacle to revising the rates would be the tax waiver that the measure would generate. The government has alleged difficulties in closing accounts and, even before Lula’s inauguration, needed a constitutional amendment to be approved to increase the spending ceiling by R$ 145 billion to fulfill promises such as maintaining the minimum portion of Bolsa Família. at BRL 600.

According to the National Association of Tax Auditors of the Federal Revenue of Brazil (Unafisco), in the annual adjustment statement for 2023, the Federal Revenue should collect R$ 328.6 billion. If the table had been corrected since 1996 based on the IPCA, the exemption ceiling would jump from the current R$ 1,903.98 to R$ 4,465.34. Even at a lower level than the R$5,000 promised by Lula, there would be a loss of R$184.29 billion, according to the entity’s calculations.

Last week, the Minister of Planning, Simone Tebet, said she saw no room for changing the tax incidence ranges in 2023 due to the loss of revenue. “If I change the Income Tax table, I am failing to collect. I have a budget to run this year. That’s why I’m saying: I can do it next year, we have four years to do it”, he defended, in an interview with the newspaper “O Globo”.

“The government has, in fact, especially after the constitutional amendment that instituted the spending cap, a greater commitment to public accounts. This does not mean not being able to make adjustments and changes in favor of tax justice”, says lawyer Guilherme Araújo.

“In the package that Haddad presented, there is an increase in other taxes. The government has already talked about increasing it, but not yet reducing it”, observes Araújo, referring to the series of fiscal adjustment measures announced by the Minister of Finance with the objective of reducing the fiscal deficit this year.

On Wednesday (18), in a meeting with representatives of trade union centrals, Lula said that he is “fighting” with party economists for a change in the logic of the IRPF. “My companions know that I have a fight with PT economists. You know that people say ‘Lula, if we exempt up to R$ 5,000, that’s 60% of the country’s revenue, from people who earn up to R$ 6,000’. Well, then let’s change the logic. Decrease for the poor and increase for the rich,” he said.

Last update on the IRPF table was in 2015

The last correction of the IRPF table took place in March 2015, during the government of Dilma Rousseff (PT), effective from April 1 of that year. With the accumulated inflation since then, the maintenance of tax incidence ranges results in an increase in the tax burden on income. Although it penalizes those who earn less more, the lack of updating ends up affecting all taxpayers.

With the update, even those who already pay the tax would have a greater part of their income exempt, in addition to a lower weight of the tax on the other ranges that make up its calculation base.

“The Income Tax is perhaps, in its conception, the fairest tax, as it charges more to those who have more financial resources. It is part of the legal doctrine, and the Constitution embodies this, that the IR follows the principle of ability to pay”, explains tax lawyer Guilherme Araújo. “In this sense, not having a lane update means a breach of this constitutional principle.”

The lag in the IR table contrasts with the policy of valuing the minimum wage, which has increased beyond inflation in recent decades. In 1996, anyone earning up to nine minimum wages was exempt from the tax. In 2022, those who received from 1.73 minimum wage already paid the IRPF. This year, if there is no correction in the table, the tax will be collected from taxpayers with income equivalent to 1.46 of the national base.

According to calculations by Unafisco, the accumulated lag of the table in relation to inflation is 134.53%. For calendar year 2023, fiscal year 2024, it will reach 148.1% if there is no correction to the table.

If the Income Tax rates had been updated since 1996 based on the Extended Consumer Price Index (IPCA), the exemption range would change from the current R$ 1,903.98 to R$ 4,465.34 in this year’s declaration, freeing tribute 18 million people. In 2024, those who receive up to R$ 4,723.77 per month would be tax-free.

Today, the highest IRPF rate, 27.5%, is levied on the portion of income that exceeds R$ 4,664.68. That is, without the lag in the table, even taxpayers who today pay the highest rate of tax on part of their income would be exempt.

Current IRPF table (base year 2022)

What would the IRPF table look like (base year 2022) with full correction from 1996 to 2022, according to Unafisco’s calculation

Bolsonaro tried to reform the IR, which did not advance in Congress

Although the tax exemption for income of up to R$5,000 was a campaign promise by Jair Bolsonaro (PL) in the 2018 election campaign, there was no review of the rates throughout his term.

In 2021, the government even forwarded a bill to Congress (PL 2.337/2021), which provided, among other changes to Income Tax, to update the table for individuals. The exemption range would rise from the current R$1,903.98 to R$2,500. Among the counterparts were provision for taxation of up to 20% on profits and dividends, and up to 15% on income from real estate investment funds (FIIs).

The PL, however, ended up quite dehydrated until approval in the Chamber and stalled in the Senate. The rapporteur for the matter at the Economic Affairs Commission (CAE), Senator Angelo Coronel (PSD-BA), even presented a separate project, proposing to raise the exemption range to R$3,300, but the proposal did not advance. be