Little tax package should make life worse for Lula in Congress – 12/28/2023 – Vinicius Torres Freire

It took a while for the Lula 3 government to understand that it was a minority in Congress like never before. It took a while to understand, in practice, that it was more isolated in numbers, ideas and also in power, as parliamentarians limited the Executive’s prerogatives.

When he understood, when he started to negotiate according to the new rules and forces at play, around May, he approved many important projects — even tax increases and tax reform. The first minister to understand the size of the problem was Fernando Haddad.

The trouble will continue to be serious, with worsening in 2024.

At the end of the year, Haddad proposed a fiscal package that does not seem to take into account the increased risks for the government in the 2024 Congress. The New Year’s Eve tax package could increase the number of opponents due to conviction or opportunism. More on this later.

Haddad said that the government will issue a provisional measure to make companies in certain sectors pay almost the full employer contribution to Social Security again. Congress had extended this exemption, which was vetoed by Lula. The veto was overturned by 83% of deputies and 82% of voting senators.

Haddad’s measure goes in the right direction of standardizing taxes, reducing tax exemptions and closing the deficit. It also avoids a big favor to small municipalities, which would no longer pay a lot of contributions to the INSS. But it is a political shot in the foot, which hits several fingers.

The minister also announced the limitation of the use of tax credits by companies granted by court decisions to the detriment of the government’s tax theses (they will be able to pay less tax, hundreds of billions).

Haddad wants the use to be split, so that the government loses less revenue immediately. If Congress approves such a thing, companies are already warning that they will go to court. Finally, the minister also wants to end the tax exemption for the events sector, which was extended in an unjustifiable manner.

Lula and Haddad told Congress that they will not swallow the payroll tax exemption, no matter how many times parliamentarians reiterate their vote. It already got bad this Thursday. It will get worse because:

1. 2024 is an election year. PT and left-wing groups will fight against the dominant center in Congress and in city halls;
2. The government and the centers will fight over the little money that remains free in the Budget, as in theory there will be spending cuts to reduce the deficit. Parliamentarians reserved more money for amendments, Lula 3 wants more money for the PAC;
3. In the final third of the year, campaigns for the election of the House and Senate commands will begin, at the beginning of 2025. Whoever pleases the conservative, reactionary, anti-leftist or negotiist majority in Congress will have a better chance of winning. It will not be a good environment for the government;
4. At some point, out of conviction or opportunism, the cry against tax increases will return, the work of a government that accelerated the increase in spending. The justice of the argument is not what matters here, but politics. To make matters worse, the government has not yet presented in a “pop” way a general demonstration of the beneficiaries of the hundreds of billions of tax exemptions nor an organized plan to reduce them. You will miss the political moment to do so. To make matters worse, next year there will be a knife fight over the regulation of tax reform and, in theory, the presentation of income tax reform.

Haddad cannot and should not give up on his tax justice and reorganization plans. But he’s going to have a problem if he wants to do it the New Year’s Eve package’s way.

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