The Brazilian package that increased the IOF (Tax on Financial Operations) in January of 2008 is bad, even taking into account the need for measures in order to balance the effects of the dissolution of the CPMF (Provisional Contribution on Financial Transactions). It fails to specify cuts in expenditure and is dependent on the approval of the provisional measure in Congress to change the CSLL (Social Contribution on Net Income). Yet again, government is trying to solve the fiscal problem with band-aids, whilst meanwhile, the opinion that tax rates are excessive is growing.
The appalling tax structure is even more worrying than the oppressive tax burden. The government’s inefficiency, the lack of transparency and the complexity of the tax system justify the perception that the tax rates are excessive, as illustrated by the following three points.
Point 1: We perceive the tax burden to be heavy because the government uses its resources badly.
Compared to the OECD member countries, Brazil’s taxes don’t appear excessive – in Sweden and Denmark, taxes account for approximately 50% of the GDP. Again, compared to OECD countries, the increase in Brazil’s taxes are not so frightening – over the past 30 years, Spain, Portugal and Turkey, for example, have increased their taxes by more than 15 percent of their GDP.
Generally speaking, countries with high tax rates tend to grow more slowly, but this relationship is weak. Sweden, which has the highest tax rate of the developed member countries, has had an excellent economic performance over the last 20 years, whilst South Korea almost doubled its tax rates over the last 30 years, yet has grown faster than the other member countries. It all depends on how the government spends its tax income. For example, expenditure on infrastructure promotes investment and growth.
The perception that Brazil’s tax rates are high derives from the government’s poor ability to resolve the country’s safety issues and improve their population’s quality of life. As opposed to South Korea, Sweden or Norway, Brazil has yet to tackle corruption, waste of public resources, excess bureaucracy, incoherent economic policies, poor integration of government bodies and the lack of properly qualified personnel.
The Australian Labor Party won the elections, in 1982, with the campaign slogan, “Run the State as a business”. The aim was to achieve an improved government performance by using the same management techniques as successful countries. In Brazil, despite the Internal Revenue adopting the use of electronic governance to good results, public services have failed to follow suit. A strategy for improving public expenditure would have to confront so-called unproductive expenditure and especially, expenditure on social security.
Point 2: Brazil’s tax rates grow ever more onerous because they lack transparency.
It is harder to increase transparent taxes that require consumers to calculate them prior to payment. This is partly because when having to work out the amount of income tax owed, a citizen has a clear understanding of how much of his, or her, income has to be handed over to the government with their tax return. This is why Brazil’s income tax is less than its indirect taxes.
Indirect taxes are paid, without general awareness, in supermarket bills, for example. On the other hand, in the US consumers can see how much they pay for a product and the amount of tax they have to pay on top. This information makes the tax system more transparent.
In Brazil, tax evasion – apparent when consumers are not issued with fiscal receipts – often forces the government to adopt a substitute tax system which charges full taxes on added value when the product leaves the factory (which has also found ways to confound auditors). Lower and more uniform taxes would reduce tax evasion. But, if the tax is hidden in the merchandise’s price, it is easier for the government to raise its rate.
Point 3: Brazil’s tax rates are even more onerous than they seem, due to the system’s complexity.
Brazil ranks the lowest of 177 countries as regards the time taken by companies to fulfill their fiscal obligations (Price Waterhouse & Coopers). The complexity of the system takes up the time and effort of accountants and therefore makes abiding the law even more onerous than just the amount of taxes paid.
The irrationality of Brazil’s tax system is such that it has already become possible for state governments to increase their tax revenues by conceding exemptions to a company at an intermediary stage of the production chain (as the next company along the chain will then forfeit its right to the tax credits paid in previous stages).
Secretary Bernard Appy’s proposal brings more common sense to Brazil’s tax system. Now, it just remains to be seen whether he will be capable of convincing the President of the benefits of reform, and whether opposition politicians are interested in its approval.