Lula government studies limiting health deductions in IR – 01/18/2024 – Market

The economic area of ​​the Luiz Inácio Lula da Silva (PT) government is studying creating a ceiling for the deduction of medical expenses from the IRPF (Personal Income Tax), similar to the rule that currently exists for education expenses.

The topic is politically sensitive, but government technicians believe that the lack of a limit ends up favoring taxpayers with higher incomes. Furthermore, the rebate has been a source of abuse and a drain on public revenue.

A well-known example of these distortions, which different administrations have tried to contain for many years, is the discount on expenses for botox (a substance used in aesthetic procedures) — in many cases declared as an expense aimed at treating dermatological diseases.

Brazilian legislation allows expenses with doctors, dentists, psychologists, physiotherapists, occupational therapists, speech therapists, laboratory tests, hospitals, clinics and health plans to be fully deducted from the IR calculation base to be paid, regardless of the amount.

As the rates are estimated on a lower base, the taxpayer collects less tax.

The value of the waiver linked to the deduction of medical expenses in the IRPF has increased in the last decade, going from R$11.8 billion in 2010 to R$18.3 billion in 2020 (in 2020 values).

In 2022, the total amount of health spending deducted by taxpayers reached R$128 billion. By not charging tax on these amounts, the IRS had a revenue loss of R$17 billion, according to data from the agency.

A previous government report showed that only 0.8% of medical deductions are used by the poorest 50% of the population, while 88% cover the 20% with the highest income.

Discussions on IR are part of a task force to identify public policies that can be reformulated or even revised to make room in the Budget in the coming years.

The technical and political feasibility of these initiatives will be the subject of discussion at the JEO (Budget Execution Board), a collegiate formed by the ministers of Finance, Planning, Civil House and Management.

The group will analyze a list of policies that could be modified, debate which are viable and give the green light to the Executive to seek the necessary changes. The objective of this strategy is to obtain political support within the government itself to support the changes, many of which are unpopular.

Furthermore, the government wants to use the JEO forum to establish a type of incentive for bodies to increase the efficiency of their policies. A preliminary idea is to protect those ministries most committed to the review from possible contingencies, which could also gain priority in resource requests decided by the board of ministers.

In January 2023, Minister Fernando Haddad (Finance) defended a fine-tooth comb in Income Tax deductions. “The first step is to take a fine-tooth comb to abuse. Every time there is no ceiling, no deduction limit, abuse is identified,” he said at the time, in an interview with the Brasil 247 portal.

The topic, however, is sensitive and should intensify debates within the government.

In the MP (provisional measure) for the reinstatement of the payroll of the 17 sectors, a preview of this debate has already led to the proposal to end Perse (Emergency Program for the Resumption of the Events Sector) — created during the pandemic and which resulted in a resignation until seven times the forecast, according to the economic team.

The new fiscal framework links the rebalancing of public accounts largely to the increase in revenue, but there is an assessment among technicians that Haddad’s ammunition to increase revenue may be at an end — which strengthens the evaluation movement in terms of expenses.

The president of the Central Bank, Roberto Campos Neto, expressed this opinion recently.

“We have a relatively low per capita income for a tax burden that is relatively high. So, it shows that we have little room for maneuver in terms of additional revenue,” he said less than a month ago.

According to interlocutors, there is also a certain consensus within the government that there is no climate to debate changes in some policies, such as the salary bonus — a type of 14th salary paid to formal workers with an income of up to two minimum wages.

Although there are a series of assessments that point to the inefficiency of the benefit, provided for in the Constitution, the calculation within the Executive is that there is no way to buy this fight in a municipal election year.

The government’s Budget remains tight with the goal of zeroing the public account deficit and seeking a surplus of 1% of GDP (Gross Domestic Product) in 2026 to contain the rise in public debt.

The technicians’ diagnosis is that the government really needs to face the spending review agenda that has a relevant dimension.

In 2021, the Executive published the evaluation report carried out by the Public Policy Monitoring and Evaluation Council (Cemap) of medical deductions in the IRPF.

The conclusion, which is used by the government in discussions, is that this tax benefit would have to undergo a redesign because of the regressive distributional effects. In other words, those who have a higher income end up benefiting more from the deductions.

The report projected a real growth (above inflation) in deductions of 65% by 2030, mainly due to the aging of the Brazilian population.

The benefit of deducting medical expenses from IRPF is governed by article 8 of Law 9,250/95. To change it, therefore, it is necessary to obtain approval from Congress.

The discussions are taking place while the government needs to prepare a proposal to reformulate income taxation. The initiative is required by the constitutional amendment of the tax reform on consumption, enacted last month and which gives 90 days for the Executive’s project on the subject to reach Congress.

The president of Unafisco (National Association of Tax Auditors of the Federal Revenue), Mauro Silva, argues that the ceiling for the rebate should be sufficient to accommodate the expenses for a family’s health plans and not be at a very low level, such as the limit to deduct education expenses.

The limit today for annual education expenses is R$3,561.50. Silva defended greater inspection action to curb fraud, such as those that occur such as the illegal deduction of botox expenses.