The devils of Brazil’s tax reform proposal

Finding ways to improve Brazil’s tax code is not hard. The system is exceedingly complex — in 2014, one tax lawyer concluded a 23-year project to compile all the country’s tax laws into a single book, handing in a colossal 41,000-page tome weighing 7.5 metric tons. It is notoriously regressive, overtaxing consumption and under-taxing income. The top income tax rate for individuals stands at 27.5 percent, but the actual tax paid by Brazil’s richest is much lower, thanks to several loopholes. 

It creates poor incentives to companies, inhibiting growth and creating a huge market for lobbying and litigation. Fairness, efficiency, and simplicity are the pillars of any good tax system, but Brazil’s code doesn’t tick a single box.

A tax reform proposal currently pending in Congress — submitted by the Economy Ministry and modified by the lower house — is, at first glance, a step toward improving this dismal scenario. Focused solely on income tax, it seeks to close loopholes for wealthy individuals, jacking up their tax rate and using the proceeds to increase exemptions for middle-class workers. 

The reform bill also creates a tax on dividends and significantly reduces corporate...