Tax reform could lead to massive layoffs, says economist

The proposal for the unification of PIS, Cofins, IPI, ICMS and ISS into a dual Value Added Tax (IVA), presented by the Working Group (GT) on tax reform in the Chamber of Deputies on Tuesday (6), may have as a direct consequence, the increase in unemployment and, thus, negatively impacting the country’s economic activity.

The conclusion is by economist Erik Figueiredo, who chaired the Institute for Research and Applied Economics (Ipea) in 2022 and is now executive director of the Mauro Borges Institute for Statistics and Socioeconomic Studies (IMB), linked to the government of Goiás. One of the economist’s criticisms of the Chamber’s WG report is that the proposal directly affects the current tax collection model for subnational entities.

According to data from the National Treasury Secretariat, the country’s tax burden in proportion to the Gross Domestic Product (GDP) was 32.51% in 2020. In that year, the Union was responsible for 67% of taxes. The reform proposed in the GT and supported by the federal government, meanwhile, should mainly impact the taxes collected by states and municipalities.

According to Figueiredo’s calculations, for every R$1 in tax that can be modified by the proposed reform, R$0.65 comes from state and municipal collections. “Clearly the federal government proposes a sacrifice of all loved ones, without doing its own homework. The federal government does not cut into its own flesh,” he says.

“When we evaluated the reform from the perspective of the importance of the changed tax for the collection of each entity involved, we noticed that the proposal intends to modify 82.3% of the collection of the states, 42.5% of the collection of the municipalities, and only 20.6% % of federal revenues”, he explains.

The economist disagrees with the proposal to eliminate as much as possible tax incentives and waivers, granted mainly by states.

“It is often said that states provide a lot of tax benefits, but why choose this model? Because the Brazil cost is extremely high”, he says. “So, in fact, the states are kind of mitigating the Brazil cost, which comes, in a significant part, from the federal government, responsible for 67% of the tax burden in Brazil”.

“They are reversing cause and effect. There is no tax benefit because the states are nice, but because you have a very high cost in Brazil and if the states do not act to attract investment, they will not be able to generate jobs in their regions”, he says. “The reform is not taking this into account.”

Economist casts doubt on thesis that economy will grow after adoption of VAT

In the report by the Chamber’s WG, presented by Deputy Aguinaldo Ribeiro (PP-PB), it is also considered that the reform would have the potential to accelerate GDP growth, so that the increase in economic activity would compensate for the percentage decrease in the tax revenue of most states and municipalities that would see a reduction in revenues. “It is evident that the poorest municipalities will earn more than the richest ones. But the richest will also win”, declared Ribeiro.

According to a technical note published by Ipea at the end of May, if the reform transition rule is “long and smooth” and the new rules generate economic growth above the country’s historical average, up to 98% of the country’s municipalities, where 99 live % of the Brazilian population tend to earn revenue over a period of 20 years. However, if the reform does not generate additional growth in GDP, the study estimates that tax collection gains will occur in 84% of the country’s municipalities, where 61% of the population resides.

Figueiredo questions the hypothesis that the reform will necessarily increase GDP. “This is based on a model that nobody really knows if it works, if it was calibrated correctly”, says the former president of Ipea. “When you look at the international evidence, you can’t find any concrete experience that actually looks at this.”

The economist compared the growth rate of countries that use VAT five years before the adoption of the tax and five years after. On average, growth in the previous five years was 1.7%, while in the post-VAT period the pace of GDP growth was 1.1%. In the case of Argentina, the advance of the indicator in both periods was 4.6% and 2.1%, respectively.

“So actually there has been a slowdown in these countries. Is it only in Brazil that this growth is guaranteed?”, he asks. “Clearly, we are not discussing a cause and effect relationship here. There are many particularities that can determine the success or otherwise of IVA in different countries. But it is precisely these particularities that are being put aside at the moment”, he points out.

“Our main point of criticism is that an extremely complex topic is being addressed without taking into account a series of effects”, he says. “At this point, we are not proposing an alternative model, but bringing a discussion to what is being proposed today without the due depth based on real, concrete evidence”.

Services sector should be the most affected by the tax reform

One of the guidelines defined by the deputies to guide the text of the proposed amendment to the Constitution (PEC) of the tax reform says that the VAT rate must be unique, with permission for differentiations in specific cases.

“In this way, an efficient system is adopted, based on the best practices of international VATs, maintaining simplification and legal certainty and avoiding litigation about the correct tax classification of various goods and services”, says an excerpt from the WG report of the Chamber.

The document argues that differentiated rates should be applied only to certain cases, but avoiding “its application to sectors of the economy as a whole”.

Today the incidence of taxes varies significantly from sector to sector of the economy. While services have a lower tax burden, products such as electricity, natural gas, oil and fuels and tobacco products bear more taxes.

Considering the maintenance of the current total tax burden, sectors such as private education, private health, sewage and waste management, in addition to other services, would be greatly harmed by raising taxes. In total, the sectors considered “losers” in the reform now employ 37.2 million people.

Starting from a model that correlates the elasticity of employment in relation to the tax burden, calculated for 30 member countries of the Organization for Economic Cooperation and Development (OECD), Figueiredo calculated that there would be a loss of around 500,000 formal jobs. “This is balance. There are sectors that will win and will hire more, while those that lose will lay off”, he explains.

“Apart from the whole chain of effects that this generates: mass layoffs generate less consumption, which generates more unemployment, and thus you enter a vicious cycle”, he says. “You have to bear in mind that the service area, which generates the bulk of employment in Brazil, will be impacted”.