Tax Reform: what’s behind the negotiation? – 7/9/2023 – Marcus Melo

It took 30 years. Yes, the diagnosis and remedies were not very different from those proposed by the Executive Commission for Fiscal Reform and in the “amendment” of the Collor government; in the 1993 constitutional revision; in the PECs presented by FHC and withdrawn from the agenda after a long process; and more recently in 2003 and 2007.

Yes, adverse contexts contributed to the failure: Collor’s impeachment, the abortion of the 1993 review and the 1997 Asian crisis. in a context of serious fiscal instability.

More than any other area, tax reforms tend to follow an incremental pattern. Broad reforms are rare events due to their multidimensionality, complexity and high risk aversion. But the current reform passed in the first round, which requires an explanation.

There is no global majority: winners and losers vary according to “size”; the place where the consumption tax is collected opposes producing and consuming states; the single VAT eliminating the (thousands of) special regimes opposes states (the PT leader sabotaged the proposal in the vote on the special automotive regime, aligning himself with Governor Ratinho Jr!); the exemption of exports divides exporters and non-exporters; load distribution creates intersectoral cleavage between services and industry; the merger of ISS/ICMS opposes small and large municipalities.

Complexity and uncertainty create strong dissent among experts and technical bureaucracies. Risk aversion is greatest here given the potential risk to be politically catastrophic.

The canonical way to overcome these problems involves two instruments: delaying the implementation of changes and creating insurance against losses. But the promises here are not exactly credible because even their constitutionalization does not guarantee “future contracts”. They are subject to further changes and the governance to be used. (Confaz’s experience shows that the unanimity rule conferred veto power to the SP, which now disappears).

The approval in the first round reflects the unprecedented consensus on the colossal dysfunctionalities of the system. Organized interests and corporations progressively hung presents on the Christmas tree of the tax system, which is now falling apart.

The protagonism of Congress, from which the PEC emerged in the previous government, is unprecedented, making it possible to be negotiated as a supra-party issue, and not of the government. The congressional bargain was anchored in the majority’s veto of the increase in the burden, which is in the government’s interest and which did not prosper. To see!

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