Lula’s tax reform – 02/11/2023 – Celso Rocha de Barros

Lula had a very busy first month in office, which included defeating a coup and stopping a genocide. But the economic agenda should only begin to be touched now, as the government’s two main priorities for the first semester —approval of the tax reform and creation of the new fiscal rule— depended on the inauguration of the new Congress.

There is a reasonable chance that Lula 3 will make Brazilian taxes more efficient and fair. For this, two reforms are necessary, and both are in the government’s plans: the first simplifies and makes efficient the devil’s furdun that is our current tax system. The second reform should mainly deal with the Income Tax and will aim to put the tax authorities to work for equality, which, in Brazil, it has never done.

The simplification proposal must be approved first, because there are already projects about it going through Congress. The main one, PEC 45, proposed by Deputy Baleia Rossi (MDB-SP), replaces five consumption taxes with two, making Brazilian taxation more similar to the value added tax (VAT) model that is the rule in developed countries. .

According to Baleia Rossi, in a statement on the episode of the MDB podcast on January 22, PEC 45 was not adopted by the Bolsonaro government because Paulo Guedes preferred the CPMF.

No one disagrees that our tax structure is a problem. Investors thinking about putting money study how the ICMS works for five minutes and already think, “Ok, Brazil is not enough, who’s next in alphabetical order, Brunei, let’s see how taxes are in Brunei”.

According to the extraordinary secretary of tax reform in the Lula government, Bernard Appy, studies show that Brazil is 20% poorer because of such distorted taxes.

For those interested, there is a 2019 IPEA study, authored by economists Rodrigo Orair and Sergio Gobetti, which discusses PEC 45 in detail, with the rigor that is characteristic of the authors (Text for discussion nº 2.530 , “Reforma Tributária e Fiscal Federalism: an analysis of proposals for the creation of a new value added tax for Brazil”).

To date, the major obstacle to implementing VAT in Brazil —which, I repeat, is what exists in countries with the most efficient economy— has been the resistance of states and municipalities that fear losing revenue in the short term. Orair and Gobetti show that PEC 45 has compensation mechanisms and the potential to generate economic growth that make “remote” the risks that states and municipalities have revenue losses with the new rule.

Although income redistribution is not the central objective of this reform —it will be the center of the Income Tax reform proposal— Orair and Gobetti’s projections show that the approval of PEC 45 would already reduce the regressivity of Brazilian consumption taxes. The size of this reduction would depend on how one of its mechanisms would work: a form of cashback, refunding taxes paid to the poorest workers.

Finally, PEC 45 is a proposal that contemplates the requirements of efficiency and equality. It is, therefore, an excellent starting point for a government with a broad front, and a chance for the left and center-right to discuss growth, not just degrees of adjustment.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.