IR: exemption for rural elite triples in 5 years – 01/25/2024 – Market

The income of rural producers that is exempt from Income Tax grew by more than 210% (140% above inflation) between 2017 and 2022 within the group that constitutes the richest 0.1% of the Brazilian adult population.

The portion of income from rural activity that remained outside the collection of taxes by the Federal Revenue reached R$ 101 billion in 2022. The share that corresponds to the 0.1% richest population in the country received almost half (42%) of this exemption.

While in this group, rural income tripled in nominal values ​​over a period of five years, for the average declarant the growth was 74% (or 32% above inflation), according to the study by economist Sérgio Gobetti.

IRPF (Individual Income Tax) data shows a significant increase in concentration at the top of Brazil’s income pyramid. The income of the middle class and the poorest remained almost stagnant in real terms, while that of the richest grew at a Chinese pace (49% above inflation).

“The increase in income from rural activity, together with the increase in the volume of profits and dividends distributed by companies, helps to explain why the richest had much higher income growth than the majority of the Brazilian population throughout the Bolsonaro government”, he explains. Gobetti.

The results indicate that, in addition to growing well above the population average, the income of the elite rose more in states where, in general, the economy is dominated by agribusiness, reaching a nominal increase of 184% in Mato Grosso in the stratum society constituted by the richest 0.1%.

In Mato Grosso do Sul, the income of this elite grew 161%, in Amazonas, 141%, in Tocantins, 134% and in Goiás it rose 120%. In São Paulo, the income of the super-rich grew practically equal to the Brazilian average – 84% in nominal values ​​or 40% in real terms in the richest 0.1% stratum.

The government will try to correct some of the distortions that have supported this situation in discussions on the second stage of the tax reform, which will affect taxes on income and wealth.

Finance Minister Fernando Haddad’s team has until the end of March to send the project with the changes to Congress. The repeal of the tax exemption on profits and dividends is a priority on the reform agenda.

In the first phase of the reform, of consumption taxes, the agribusiness bench put pressure on negotiations and obtained advantages for companies in the sector in the new model. The bench was one of the most active in measuring strength with industry representatives, who were counting on less favorable treatment for agribusiness so that the standard rate of the new tax would be lower.

This game of forces was influenced by the growth of GDP (Gross Domestic Product), last year, driven by the agricultural sector, especially in the first quarter of 2023, which was much higher than expected. In defense of the exceptions for agribusiness in the reform, parliamentarians argued that, depending on the final result, economic growth could be compromised.

In this second phase, the expectation is that the agricultural sector will increase pressure, as it already did in the negotiations on the IR reform project during the Bolsonaro government. The project was approved by the Chamber with a large majority, but then remained in the refrigerator in the Senate. The Lula government’s idea is to send a new text.

The Federal Revenue reports that served as the basis for the study by Gobetti, who is a researcher at Ipea (Institute for Applied Economic Research), also show that rural producers are the activity that, in recent years, obtained the highest level of exemption among IRPF declarants.

For the economist, income data shows that these distortions need to be urgently reviewed.

In 2022, 460 thousand people declared that their main occupation was agricultural production and managed to have 69.3% of their income exempt.

The percentage is considered high by experts, mainly due to the fact that it is benefiting very rich people and not just the “small producer”. According to Gobetti, this “finding” of the research shows the importance of promoting a general review of the exemptions in force in IR legislation and which, in general, benefit the most privileged people and families, whether in the rural sector or in other segments of the economy. .

In the case of rural activity, according to the economist, the legislation allows, in simple terms, only 20% of producers’ revenue to form the basis for calculating the tax. This is the rule applicable to ruralists who choose to declare income from their activity as an individual.

Producers who set up companies to carry out the activity, however, also enjoy a similar level of exemption, in this case due to the non-taxation of profits and dividends.

In Brazil, around 2.5 million declarants define themselves as company directors or presidents and have an average exemption of 69% — the second most exempt occupation, according to Revenue data, practically tied with that of rural producers.

What draws the most attention in the data is that the positive performance of the income of the super-rich occurred in a period in which the economy was struggling and the majority of Brazilians had a modest increase in their income, close to or even below inflation.

“This shows that the growth in income of the richest does not spread to the rest of society, as predicted by some theories from the 70s and 80s”, says Gobetti.

If Congress revokes the exemption for profits and dividends, many producers who currently have companies may choose to declare part of their income as an individual to take advantage of the sector-specific exemption. Therefore, there is a diagnosis of the need to globally review exemptions and the current model, eliminating tax planning loopholes.