Taxes will be better with this Tax Reform – 11/04/2023 – Celso Rocha de Barros

In the coming weeks, Brazilian taxes could become similar to those in developed countries.

The Tax Reform proposed by the Lula government, based on decades of discussions in the National Congress, could be approved by the Senate on Thursday, the 9th.

Tax Reform will unify several existing taxes into a value-added tax (VAT), like the one that exists in most countries. It will also have a cashback device, which will return part of the taxes paid by the poor.

Apparently, these are good ideas.

According to a recent OECD policy brief, “Redesigning Brazil’s consumption rates to strengthen growth and equity”, Tax Reform could “reduce tax distortions and produce significant improvements in productivity and economic growth”.

Economic Note No. 18 of 2023 from the Institute of Applied Economic Research (“Redistributive impacts of tax reform: updated estimates”) estimates that “82% of municipalities gain from the reform, percentages that increase when considering the positive impacts on the GDP and, indirectly, on the tax revenue pie”.

A study by the Federal University of Minas Gerais (“How Cashback can reduce inequalities in Brazil”) estimated that the combination of changes in taxes with the cashback mechanism (tax refunds for poor taxpayers), provided for in the reform, could increase power consumption of 89% of the Brazilian population.

The proposal that will come out of the Senate, like the one that came out of the Chamber of Deputies, has more exceptions than would be ideal. This was to be expected: after all, if the current system has so many distortions, it is because there are politically strong sectors that benefit from them.

Even so, the renovation is still worth it.

Melina Rocha, a former World Bank consultant, recently posted on X (formerly Twitter) that half of the countries in the world that use the system proposed in tax reform (Value Added Tax) also has exceptions. After all, it is not just in Brazil that there is politics.

However, he concludes, “I have no doubt that the report we have today [base para a votação no Senado] It’s infinitely better than our current tax system.”]

Nor would it be fair to say that Congress only made the government’s proposal worse.

According to Bernard Appy, extraordinary secretary of Tax Reform at the Ministry of Finance – and one of the fathers of the reform – the Senate text corrected problems and already resolves 75% of the distortions in the current Brazilian tax system.

Ultimately, the approval of the Tax Reform is exactly the type of thing that Brazil needs to do more of: combat obstacles to economic development through major democratic negotiations.

It’s also the kind of thing that a broad-front government, like the third Lula government, can do well.

In my column of November 7, 2021, when we began to consider the possibility of a Lula/Alckmin ticket, I suggested that this same Tax Reform proposal could be one of the axes of a consensus program.

Brazil will have a great victory if we manage to have the Tax Reform approved as it is, without new exceptions or privileges, in 2023. We will grow more and will have shown that our democracy is capable of promoting great changes.

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