The history of income inequality in Brazil

</p> <div class="flourish-embed" data-src="visualisation/578833"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>Over decades, the country has seen waves of income concentration among the rich. While economic recessions and political crises go hand in hand, they also tend to affect inequality.&nbsp;</p> <p>In order to understand how inequality in Brazil has persevered over the years, <strong>The Brazilian Report</strong> talked to Pedro Ferreira de Souza, a researcher at the Institute of Applied Economic Research (Ipea). Mr. Ferreira de Souza has published a series of studies and a book entitled “A History of Inequality: Income Concentration Among the Rich in Brazil 1926-2013.” See below his views on why Brazil is one of the most unequal countries in the world.&nbsp;</p> <p><em>Note: This interview has been condensed and edited for clarity.</em></p> <figure class="wp-block-image"><img src="https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01-1024x683.jpg" alt="Ipea researcher Pedro Ferreira de Souza" class="wp-image-21974" srcset="https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01-1024x683.jpg 1024w, https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01-300x200.jpg 300w, https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01-768x512.jpg 768w, https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01-610x407.jpg 610w, https://brazilian.report/wp-content/uploads/2019/08/8-8-2019_Pedro-Herculano-Pesquisador_Helio-Montferre_Ipea_01.jpg 2048w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Ipea researcher Pedro Ferreira de Souza. Photo: Helio Montferre/IPEA</figcaption></figure> <h4>You’ve said that income inequality didn’t considerably decrease during President Lula’s administration, but a lot of people were brought out of poverty. How did this happen?</h4> <blockquote class="wp-block-quote"><p>It’s important to understand the difference between inequality and poverty— they vary independently. Inequality is the relative difference between people’s income. Poverty is based on a certain income threshold. Back then, we thought that there was a considerable decrease in inequality even before President Lula came to power. Inequality fell by 10 to 15 percent [between 2001 to 2015]. However, when you consider income taxes and the concentration of capital, the scenario changes. Indeed, there was a decrease in inequality, but it wasn’t as strong as we expected—inequality only decreased by 50 to 70 percent of what we initially thought. Though the income of the poorest populations increased the fastest, the income of the richest segments also grew considerably. Therefore, the fall in inequality was much smaller than we imagined.</p></blockquote> <h4>If the decrease in income inequality was lower than expected, why did poverty decline?</h4> <blockquote class="wp-block-quote"><p>A series of factors contributed to this. In terms of long-term factors, people were having fewer children and the population was getting older. The labor market was also performing exceptionally well. During Lula’s administration [which coincided with the commodities boom], there was an increase in formal employment opportunities. There were also a series of social programs that catered to lower-income populations. We saw a valuation of the minimum wage, greater social assistance, and the <a href="https://apolitical.co/solution_article/brazil-lifts-millions-poverty-direct-cash-transfer-scheme/">development</a> of [cash transfer program] Bolsa Família, which guaranteed a minimum income for the poorest Brazilians.&nbsp;</p></blockquote> <h4>Has the current economic crisis <a href="https://brazilian.report/money/2018/12/16/shape-brazil-economic-recovery/">affected</a> inequality in Brazil?</h4> <blockquote class="wp-block-quote"><p>We still don’t have a clear picture of what has been happening over the last few years. Though we already knew this was going to happen, Brazil&#8217;s official statistics agency changed its research methods. Unfortunately, this change coincided with our economic crisis. Therefore, data from 2016 and 2017 isn’t comparable with that of previous years. However, what we’ve observed over the last two years is an increase in poverty and a smaller increase in inequality, though these changes were not as explosive as they could have been, considering the scale of the crisis. This was because of Brazil’s strong social security system, which cushioned the impact of the crisis.&nbsp;</p></blockquote> <h4>You’ve written that back in 1978, 80 percent of the Brazilian workforce hadn’t completed basic education. By 2013, almost 55 percent of the workforce at least had a high school diploma. However, the increase in education did not affect inequality. Why was this the case? What role does education play in fighting inequality?</h4> <blockquote class="wp-block-quote"><p>There are many types of inequalities. In Brazil’s case, I look at the income concentration amongst the richest segments, as a big part of our problem is due to low redistribution. In Brazil, one to five percent of the population has a much higher income concentration than in other countries. This doesn’t mean that education doesn’t play an important role [in the fight against inequality]. To the contrary, education has many decisive impacts, but it’s not that relevant when you’re looking at the top 1 percent of the population. In general, the difference between the top 1 percent and those that come right after isn’t their level of education.&nbsp;</p></blockquote> <h4>You’ve written that the Brazilian tax system doesn’t fulfill its redistributive potential. Can you expand on that?</h4> <blockquote class="wp-block-quote"><p>What caught my attention is that Brazil has a relatively <a href="https://brazilian.report/podcast-brazil/2019/05/01/tax-system-brazil-complex/">high tax burden</a>, but it relies heavily on indirect taxes. Taxes on consumption and other methods of indirect tax are the main source of income for the Brazilian state. This is common for lower- to middle-income countries, but when we look at richer states, their main source of capital is direct taxes. When it comes to indirect tax, those who buy a bag of rice will pay the same tax [regardless of their income]. As lower income consumers spend almost everything they earn because they can’t develop savings, these indirect taxes don’t actually redistribute income. On the other hand, direct taxes are progressive by definition— the higher your income, the higher your taxes. There is a lot of space to develop Brazil’s collection of direct taxes. The idea would be to develop a <a href="https://brazilian.report/podcast-brazil/2019/08/07/brazil-tax-reform-congress-2019/">tax reform</a> based on developed countries aimed at decreasing inequality.&nbsp;</p></blockquote> <h4>Many people say that taxing the rich can decrease inequality. However, others say that big fortunes help move the economy and that if you overtax them, they will simply flee the domestic market. Some also say that increasing taxes doesn’t necessarily result in higher tax collection, as it can motivate tax evasion. What is your take on this?</h4> <blockquote class="wp-block-quote"><p>This is an empirical question. One scenario is if you have an 80-percent tax burden and want to further increase it. Another completely different scenario is increasing a tax burden smaller than 10 percent. Obviously, the consequences will be different. Under reasonable increases [in taxation], we won’t see higher evasion rates and a decrease in tax collection. In the United States, for example, the marginal income tax rate can reach up to 70 percent. In Brazil, the maximum marginal income tax rate is only 27.5 percent. I’m not saying we need to reach the same level as the United States—that’s a long process—but it just goes to show that we have a lot of room for improvement. The negative effects of increasing taxes for the rich have been exaggerated, partly due to ideology. The ideal scenario would be to gradually increase taxes, slowly evaluating the reaction to these changes.</p></blockquote> <h4>Brazil has experienced waves of income concentration under different political climates. In fact, inequality increased during the Getulio Vargas Era (1937-1945) and the military regime (1964-1985). Why?</h4> <blockquote class="wp-block-quote"><p>It has to do with the nature of these authoritarian regimes. Democracies always pressure political actors to improve the masses’ quality of life. Politicians under a democracy rely on votes to stay in power, so if they can’t improve living conditions, they don’t get reelected. An authoritarian regime doesn’t rely on the vote so it doesn&#8217;t govern for the majority. Especially during the beginning of a dictatorship, the regime is still very strong and can easily approve measures that can seriously impact income distribution. During the New State [Getúlio Vargas] era, the regime allowed the economic elite to benefit from World War II, which increased inequality. [Under the military regime] in 1964, unions were automatically declared enemies of the state. Facing no opposition for many years, the regime passed a series of reforms that increased income concentration among the rich, despite the reforms allegedly promoting growth for all. As they’re not held accountable by different interest groups, dictatorships pass reforms that will only benefit their allies.</p></blockquote> <h4>How do political crises affect inequality?</h4> <blockquote class="wp-block-quote"><p>In times of acute political and economic crises, the government passes more drastic reforms. Facing a crisis, even under democracy, you can’t operate the way you always have. You have to innovate. This opens up possibilities for big changes in inequality. During World War II, many European countries had to mobilize great parts of their populations. To legitimize the war effort, the government had to show that it was redistributing sacrifices, or capital, in a more equal manner. These measures ended up decreasing inequality. I don’t hope that Brazil goes through the same process because [the war] was a catastrophe, but what we see is that short periods of crisis result in changes in income distribution. I can’t think of a country that slowly, steadily and democratically decreased their inequality from Brazil’s level to that of France or Germany without a moment of crisis. I’m not saying it’s impossible, but it’s never been done before. In reality, no one wants to decrease inequality by facing a crisis that puts our democracy at risk, but this just goes to show how difficult it is to fight inequality without facing difficult scenarios.</p></blockquote> <h4>A lot of people refer to our past of slavery as a reason why inequality still persists in Brazil. However, you’ve also said that Brazil has had many opportunities to overcome the burdens of slavery, yet followed the path towards greater inequality. What choices helped drive inequality in Brazil?</h4> <blockquote class="wp-block-quote"><p>Brazil is a country deeply affected by slavery. Slavery put us at a very high level of inequality, but other countries in similar levels of inequality were able to overcome it. We weren’t able to do this because we repeatedly made decisions that reproduced inequality over time. During the 1964 dictatorship, for example, we clearly deepened inequality. During the 19 years of democracy after World War II, we saw a decrease in inequality and it looked as if we were on the right path. After the [1964] military coup, there was a strong increase in inequality, especially during the regime’s first eight to ten years. At the time, the regime misjudged the economic crisis. They thought that decreasing salaries and increasing profitability would attract investment and promote growth. Brazil grew, but it did so unevenly. Everyone’s income increased, but the poor benefited far less than the rich. If the regime had better economic policies during the 1980s, they would have also avoided other crises, and Brazil would look different today. The recession and hyper-inflation were devastating for the poor.</p></blockquote> <h4>In a recent interview, you said that Brazil has one of the world’s highest levels of inequality and that this contrast between the rich and poor must decrease for democracy to properly function. Can you explain this idea for us?</h4> <blockquote class="wp-block-quote"><p>Brazil’s level of inequality is incompatible with democracy because a small segment of the population has far more resources and greater capacity to influence politicians. This pressures politicians to be more attentive to the demands of the rich.&nbsp;</p></blockquote> <h4>Will the <a href="https://brazilian.report/newsletters/daily-briefing/2019/08/07/brazil-pension-reform-antitrust-press-corporate-earnings/">pension reform</a> affect inequality in Brazil?</h4> <blockquote class="wp-block-quote"><p>Some of the simulations we’ve made (however limited they may be) showed that the pension reform will have very little impact on inequality. Its effects will be fiscal, rather than focused on fighting inequality itself. I think they could’ve done more, but I understand the pension system has limits and the reform has other important priorities. Based on our simulations, the reform will have almost no effect on inequality, but we will observe considerable fiscal gains. What we must ask is: what will happen to the resources that we are saving? Depending on the answer, the reform has the potential to really fight inequality in Brazil.&nbsp;</p></blockquote> <h4>How can Brazil continue to decrease inequality and increase income?</h4> <blockquote class="wp-block-quote"><p>The main thing we must do in the short-term is to review our policies and public spending to consider their impact on growth and income redistribution. A tax reform that increases direct taxes and decreases indirect taxes can also greatly decrease inequality. Strengthening social programs for the poor is also essential. We must develop the Bolsa Família program. We must also focus on improving the quality of education for young children to promote long-term growth. Of course, this is all easier said than done. None of these measures will solve inequality by themselves, we must implement a series of them.</p></blockquote> <p>