Income tax exemption: Lula’s promise could cost BRL 216 billion – 05/02/2023 – Market

President Luiz Inácio Lula da Silva’s (PT) promise to raise the IRPF (Individual Income Tax) exemption for salaries of up to R$5,000 until the end of his term could cost R$216 billion over four years, according to calculations by XP Investimentos.

The estimate is preliminary and considers the maintenance of the exemption model adopted this year by the PT government, which reduces the impact on public accounts. The format combines table correction and a simplified deduction —advantageous only to those with lower earnings.

The potential impact of the promise is less than the R$423 billion that would not be collected if the Lula government simply corrected the IRPF table to raise the monthly exemption range to R$5,000.

Even so, the value is significant at a time when the economic team is still chasing fiscal balance. The team led by the Minister of Finance, Fernando Haddad, has already launched a series of measures in an attempt to raise federal revenues and resume a surplus trajectory – when the government has more revenues than expenditures.

Many of them, however, have not yet had the expected effect or come up against legal impasses.

The expansion of the Income Tax exemption has been on Lula’s list of promises since the 2022 election campaign, but is seen with reservations in the economic area precisely because of the impact on the accounts. The political wing considers that the expansion of the consumption power of families will also bear fruit for the government, giving impetus to economic activity.

The idea was reaffirmed by the PT in declarations on this 1st of May, when he spoke during a unified act of the union centrals in celebration of Labor Day, in São Paulo.

“Until yesterday [30 de abril], workers who earned more than R$1,903 paid income tax on earnings of more than R$1,900. Now, we have increased the limit to BRL 2,640. So, up to R$2,640, no one will pay a penny more in Income Tax. And you know that I have a commitment with you until the end of my mandate that we will have an exemption of up to R$5,000”, he said.

The president also defended the total exemption of income received by workers in the form of profit sharing (profit sharing). Today, these amounts are tax-free up to a ceiling of R$6,270 —above that, rates ranging from 7.5% to 27.5% apply.

XP Investimentos economist Tiago Sbardelotto calculates that Lula’s promise to raise the IRPF exemption could cost BRL 36 billion in 2024, BRL 70 billion in 2025 and BRL 106 billion in 2026, the last year of the PT’s mandate. This year, the correction should have an impact of R$ 3.9 billion, in the specialist’s accounts.

The simulation considers a gradual correction of the table and the maintenance of the simplified deduction, a mechanism created by the government to grant the benefit only to those who do not have another higher amount to deduct from the tax, such as a contribution to Social Security or payment of a pension.

This year, the simplified deduction will be R$528 per month (equivalent to 25% of the new exemption range, which is R$2,112). According to Sbardelotto, the account predicts that this proportion of 25% will be maintained over the years.

For the economist, the innovation implemented by the Lula government should be maintained even after an eventual reform of the Income Tax, since it focuses the benefit of the exemption only on workers at the base of the pyramid. “It’s easier for the government to raise it to R$5,000 at a lower cost”, he says.

On the other hand, he points out that this strategy has limits, since the expansion of the simplified deduction can lead to changes in taxpayer behavior, which would have a guaranteed exemption. “The impact could be greater,” he says.

In the case of the PLR, the cost to the government would be lower (around R$4 billion a year, according to XP Investimentos), but the measure would be more regressive —that is, it would benefit workers with higher incomes, who only receive a PLR worth more than R$ 6,270, almost five minimum wages.

Among those contemplated would be employees of state-owned companies not dependent on the National Treasury, which have generous PLRs. As shown to Sheetin 2021 the average profit sharing payment was R$ 24.3 thousand at Caixa, R$ 27 thousand at Banco do Brasil and R$ 108.1 thousand at BNDES (National Bank for Economic and Social Development).

Private sector workers who receive PLR ​​would also benefit. In 2021, taxpayers declared income of BRL 34.1 billion with profit sharing in the 2020 fiscal year.

“The measure would end up benefiting a portion of workers who receive higher incomes today”, says Sbardelotto.

The economist also warns that the public defense for more exemptions signals the opposite of what the economic team itself has been preaching.

“The government has been giving contradictory signals. It talks about establishing a spending ceiling in one week, and the following week institutes a real correction of the minimum wage based on GDP growth [Produto Interno Bruto] of the previous two years and in the policy of valuing employees. There are several expenses being created. Although on the revenue side, the government has announced several recomposition measures, the government is also rushing to increase these exemptions”, he says.

In the case of the PLR, the measure may still hinder the discussion of taxation on profits and dividends distributed by companies to their partners and shareholders. Brazil is one of the few countries that does not tax this type of income. The economic team wants to charge income tax on these amounts, but the PLR ​​exemption could create noise around this debate.

For the XP economist, Haddad’s packages to raise more may not be enough to meet Lula’s promises.

The government has already announced changes in the Carf (Administrative Council of Tax Appeals), the administrative court that judges tax conflicts, created a program for debtor taxpayers to renegotiate their debts and counts on the end of a loophole in the legislation to avoid discounting tax benefits from the ICMS from the federal tax calculation basis.

The last change alone could yield BRL 90 billion in Haddad’s accounts. However, when the minister was preparing to celebrate a victory with a favorable judgment in the STJ (Superior Court of Justice), the STF (Federal Supreme Court) suspended the application of the measure, postponing the practical effects on the collection.

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How much is the Income Tax exemption today?

The Lula government edited an MP (provisional measure) to raise the exemption range to R$ 2,112 and create a simplified deduction of R$ 528. In practice, income of R$ 2,640 will be exempt from income tax – the equivalent of two minimum wages.

What did Lula announce on May 1st?

The president promised to extend the income tax exemption to those earning up to R$5,000 a month until the end of his term, which ends at the end of 2026.

How much will the government fail to collect from this?

According to calculations by XP Investimentos, the tax waiver could reach R$ 216 billion over the four years, considering the maintenance of the model that combines table correction and simplified deduction.