We are living in what are probably the most politically polarized times in Brazilian history. Arguments about the elections are tearing families apart and having a negative effect on people’s mental health. It is hard to agree on anything. But there might be one issue that unites us all: taxes.
In general, Brazilians believe they pay too many taxes. Especially when you factor in what citizens get in return in the form of public services. One of the main villains is income tax, the champion in generating revenue for the state since 1979. Born in 1922, Brazil’s income tax law was approved by Congress and stated that all citizens and companies should pay a yearly amount related to any kind of revenue. It was implemented in 1924, including only one article and eight paragraphs. It was not the first time Brazil taxed income, but previously there was not an institution that took care exclusively of this kind of tax. From then on, there would be.
Emperor Pedro II had already outlined a law that created this form of taxation. The imperial economy, based on slavery and dominated by elites, had a very small universe of possible taxpayers, seeing as few people had any source of income. Also, Brazil was (and still is) a large country, which made it hard to implement such a complex form of taxation. It was only in the Old Republic that it would become institutionalized. The Constituent Assembly of 1891 had discussed the matter but ended up not creating the income tax.
One of the most vocal defenders of the need for a tax based on what citizens and companies receive was Ruy Barbosa (1849-1923), the first Minister of Finance of the republican period. He even wrote a 38-page report about the advantages of having an income-based tax system. “In Brazil, until now the attention of governments has been concentrated almost exclusively on the application of indirect tax, in its most trivial, of immediate results: customs duties.”
In 1942, Brazil decided to join World War II against the Axis and income tax was used as a means to finance the country’s war effort. A decree by then president-dictator Getúlio Vargas determined that the amount paid should be doubled. Half of the revenue went to fund the army. A year later, it became the most important tax for the government for the first time in history.
In the beginning, income tax represented only 3 percent of all federal revenue. However, its importance grew over the years. In the 1930s, it reached 8 percent of the total, far less than import tax. World War II changed this, with a drop to international trade and therefore Brazil’s revenue from imports. In 1943, the share of income tax had reached 28 percent. Then, in 1944, it finally became number one – sharing the podium with consumption taxes. Since 1979, income tax has been the main source of revenue for the federal government.
Brazil’s income tax: who pays what?
Since the 1940s, rates were instituted. The higher a person’s income was, the more tax he or she paid. The proportions varied through the years, but in 1965 the Brazilian internal revenue service created the largest bracket in history: 65 percent. Currently, Brazil has 5 income tax brackets. In the first one, for citizens whose monthly income is of BRL 1,903.98, no tax is charged; in the second bracket, the income tax is of 7,5 percent, for those with a monthly income between BRL 1,903.99 and BRL 2,826.65; the next level is 15 percent for incomes between BRL 2,826.66 and BRL 3.751,05; then 22.5 percent for incomes between BRL 3,751.06 and BRL 4,664.68. The highest tax bracket, 27.5 percent, is applied to incomes above BRL 4,664.68.
According to historian Jorge Caldeira, author of a book about the history of taxes in Brazil, the democratic regime of the late 1980s inherited a gigantic and bankrupt state. It was not possible to reduce the tax burden because debts needed to be paid, he says. That is why the tax burden remained at the same levels inherited from the dictatorship. Former presidents Lula and Fernando Henrique Cardoso got lucky, he believes, because they didn’t have to make profound changes. Revenue increased because the economy remained stable. Key factors were both the end of inflationary corrosion and the fact that the information technology allowed for the collection of taxes through the formalization of activities. There was no need to reform the tax legislation.
Income tax was the subject of a political battle between current presidential candidates Fernando Haddad and Jair Bolsonaro. Paulo Guedes, the former’s economic “guru”, said in an interview that their proposal to reform the current system was to institute a single tax bracket: 20 percent for all incomes. The Workers’ Party and Mr. Bolsonaro’s opponents were quick to point out that such an idea would be unfair. Charging the same amount to those with lower and higher incomes was bound to increase income inequality.
Mr. Bolsonaro, noticing that his guru’s idea could damage his campaign, dismissed the idea and contradicted Brazil’s likely next Minister of Finance. Mr. Haddad tried to take advantage of the miscommunication in his opponent’s campaign and said that all Brazilians with an income lower than five times the minimum wage (BRL 937) would be exempt from income tax.
Income tax v. inequality
The issue is not just important for increasing government revenue. According to Oxfam, the Brazilian system is unfair to poor people and extremely easy for the rich. Calculations made by news portal G1 show that the richest 1.62 percent are granted almost half of all income tax exemptions. Of the BRL 844 billion in exemptions in 2017, almost half of the total, BRL 390.5 billion, went to those with a monthly income above BRL 52,800.
According to specialists, there should be more brackets to tax higher incomes. The current system creates distortions because, in proportion, poorer Brazilians pay more taxes than richer citizens. Consumption taxes have the same impact on everyone, so this form of taxation is heavier for those with lower incomes. Also, a significant part of wealthy Brazilians’ income originates from profits, which are not taxed.
A simple calculation shows the discrepancy. Someone with a monthly income of between BRL 6,161 and BRL 8,800 pays the same rate as someone who makes R$ 281,000 a month: 5.85 percent.
Both Mr. Bolsonaro and Mr. Haddad want to reform the income tax system because they believe that the changes can generate more revenue. “Populists always believe that it is possible for the state to do more, to spend more – and to simultaneously have economic development in the private sector, that there is a correlation between public spending and economic growth”, he says. But according to the data, Mr. Caldeira believes, this is not true.
In the end, even though Brazil is not among the countries where citizens pay the highest amount of income tax, there is some truth to the idea that Brazilians pay too much. “The Brazilian state”, Caldeira says, “is inefficient as an intermediary between economic production and distribution of wealth.”