1. Income Tax

2. Property Tax

1. Main Points

2. Pros and Cons

1. Main Points

2. Pros and Cons

1. Main Points

2. Pros and Cons

1. The Brazilian Federation

During the 1970’s Brazil, like many other countries in Latin America, absorbed excessive liquidity from U.S., European, and Japanese banks. Huge capital inflows were directed to infrastructure investments and state enterprises were formed in areas that were not attractive for private investment. The result of this capital infusion was impressive: Brazil’s Gross Domestic Product - GDP increased at an average rate of 8.5 percent per annum from 1970 to 1980 despite the impact of the 1970’s world oil crisis. Per capita income rose fourfold during the decade to a level of US$ 2,200 in 1980.

In early 1980’s, however, a sudden, substantial increase in interest rates in the world economy coinciding with lower commodity prices precipitated Latin America’s debt crisis. Brazil was forced into strict economic adjustments which brought about negative growth rates. The unexpected suspension of capital inflows reduced Brazil’s capacity to invest. The burden of its affected public finances contributed to an acceleration of inflation. In 1987, the government suspended Brazilian interest payments on its foreign commercial debt.

The 1980’s crisis signaled the exhaustion of Brazil’s Import Substitution Model and it contributed to the opening up of the country’s economy. (Import Substitution is a policy that nurtures local industry by prohibiting the purchase of certain manufactures abroad). In the early 1990’s Brazil’s economic policy centered on three main areas: 1- economic stabilization, 2 - moving the country away from protectionism toward a more open, market-driven, economy, and 3 - normalizing relations with the international financial community. In the first area - economic stabilization - the country has followed strict discipline, adopting tax reforms and measures to enforce tax compliance, carried out programs of deregulation and privatization, reducing price controls in 1992 and, in order to establish a true market economy and eliminating them altogether in 1993. For the first time, Brazil adopted limits to its issuance of currency. With the introduction in July of 1994 of Brazil’s new currency, the Real, the annual inflation rate fell from 2,568% in 1993 to 19% in 1995, and to 9.4% in 1996.

The abrupt fall of the inflation caused by Real Plan, which made possible the maintenance of the real value of the basis of calculation of the taxes and contributions, provoked increment in the tax revenue. The net revenue of the Federal Government (treasure, Welfare and Central Bank), in prices of December 1995, increased 29,6% in 1994, in real terms, bringing up the collection to the value of R$ 92,5 billion. In 1993, this revenue was R$ 71,4 bilhões. Federal Government presented, in 1994, primary surplus of US12,7 billion, in prices of December 1995. This represented increment of 67,9%, in relation to the result of 1993. In 1995, collection continued improving. Between January and December of 1997, the total net revenue reached R$ 106,2 billion, in prices of December, increasing 14,7%, in relation to the same period of 1994.

The fiscal situation, however it is not so satisfactory. The net debt of the public sector has been suffering significant increase. From 1996 to 1997 comprised from 33.3% to 34.3% of GDP. The operational deficit grew from 3.8% to 4.3% of the nation’s GDP and the nominal deficit increased from 5.9% to 6.1% of GDP. Simple observation of the government's bills shows clearly that the focus of the fiscal unbalance is in social security. Both years 1997 and 1996 social security had its debts partially covered by resources of the national treasury.

Federal collection, in spite of having presented significant growth of 9.77% in this period, has depended substantially on temporary revenues from CPMF and telephone concessions, for example, in order to balance its bills avoiding a true economic and financial catastrophe.

In October of 1998 the Federal Government proposed to the Congress a Fiscal Stability Program that will demand, measures at federal and state levels.

The Government cannot make changes in about 75% of the budget. The constitution doesn't allow the government to alter the expenses with the Welfare, nor with the wages and benefits of civil servants. The transfers to the municipalities are also defined in the Constitution. The Executive branch is allowed to reduce expenditures in less than 25% of the budget. This is called funding, and half of these resources refers to health, education and social attendance, that are basic needs of the population.

The Government is proposing to Congress a cut in these areas of 8.7 billion for 1999, but this is not enough to balance the bills of the country in the short run.

The Government is also proposing, to increase the contribution of the civil servants for their social security system. The COFINS can be increased and CPMF will have raised its brackets of 0.20% to about 0.35%.

According to the Government, these emergency measures will be suspended as soon as the balance is recuperated in the bills. This depends also on the conclusion of the reforms as soon as possible. Not only the Tax and Administrative Reforms but mainly the Social Security System Reform which has been compromising the situation of States excessively.

Projections indicate that most of the states will have very serious problems to pay their bills next year. Six States probably can begin 1999 without conditions to pay their payrolls. Worse than that, the debts are very high, the collection is falling and just a few state companies remain to be privatized. Moreover, every month States must alleviate part of the revenue (between 11% and 15%) to decrease its debt with the Union. With the Fiscal Stability Program this picture can become worse.

It seems that the only way for that States to avoid the bankruptcy would be to make some adjustments too. There would be three alternatives to balance the accounts: to dismiss public sector employees, to reduce wages or to collect a contribution of the servants. Dismissing takes much time and emergency measures are necessary. Decreasing wages is prohibited by the Constitution. The only option that remains, then, is to extract more contributions from the active and inactive civil servants.

That measure was already taken by the Federal Government, which included the increase of the social security contribution of the civil servants in the package of fiscal adjustment announced after the elections. Public employees of the Union that earn up to R$ 1,200 should continue contributing 11% for their retirement. Those who receives more, will start to committ the same percentage up to R$ 1,200 plus 20% on the surpassing value. For while, that is decided as just for active public employees, but the idea is also to extend the contributions for inactive ones. In the case of the States, with some exceptions, civil servants don't contribute anything for their retirement.

The most critical situation, now, are the states of Espírito Santo, Alagoas, Santa Catarina, Minas Gerais and Pernambuco, where resources for payment of the thirteenth wage¹ do not exist much less an for investments for next year.

Alagoas, Santa Catarina and Pernambuco still suffer the consequences of the episode of the "precatórios". In those States, the governments emitted public titles for the payment of judicial debts (the "precatórios"), but they allocated the money for elsewhere. Only in 1999 the state of Alagoas will have to pay R$ 800 million, the equivalent to the almost ten months of the State tax collection. Complicating the situation is the state of Minas Gerais where it consumes 78% of revenue just to pay its monthly payroll.

However, the situation of State Espírito Santo is the worst: Its payroll consumes 95% of the revenue and 60% of the employees have not received wages for three months. The revenue doesn't surpass R$ 100 million, insufficient for paying off the R$ 135 million of late wages.

The situation is not so better in Goiás, Paraná, Rio de Janeiro, Rio Grande do Sul , Amazonas and Acre. Due to the commitment of the payrolls, the debt a fall in the revenue these states will mean begining the year in troubles. In Mato Grosso do Sul, for example, the collection revenue is frightening. The State has one of the worst collections of the Country. In October of 1998, it just collected R$ 55 million for a payroll of R$ 45 million. A low revenue is attributed to the fiscal privileges given to the most productive sectors: the agriculture and cattle culture. In Goiás, the collection has also dropped and the total debt reached R$ 4.8 billion for a monthly revenue of only R$ 155 million. In Rio Grande do Sul and Paraná the payroll is more worrisome: it is consumed, respectively 81% and 72%. The elected government is against the privatizations, but even they want there would have just a few companies to be sold. The more lucrative state companies were already negotiated by the current government, which used a great part of the total of R$ 5 billion of the privatizations to pay its debt.

Paraná will have to face the expenditures of the retired civil servants and pensioners, which consumes 30% of the whole payroll. The idea is to create a pension fund with the government's properties and the some state companies’ stocks, which could create up to 1 billion in assets to compose the initial capital.

The same project is being studied in another States as São Paulo, Bahia and Ceará that, despite having balanced finances, continue to be worried about the growth of the payroll. Cutting investments and even the possibility of dismissing employees are now being talked about.

The most common opinion, even so, it would be the contribution of the active and inactive servants to provide superavit in the primary bills. Thus, States would be, in fact, participating in the fiscal adjustment, with the Union, and the situation would tend to change.

Nobody likes to pay taxes in Brazil or anywhere. The taxpayer's aversion to those that collect tributes is universal, but in Brazil it was taken to the maximum limit. Tax evasion has become a state of art fraud - before being an exception, it has turned into the norm. There are two classes in Brazil: The ones that pay and the ones that do not pay taxes.

In the business world, the first category is a minority. Included are foreign companies ones that have stocks in the market and the great companies of national capital. The organized companies cannot take the risk of having a parallel cashier. From a certain size and complexity, to defraud means to lose the control of the company.

In Brazil who pays tax, pays a lot. And, besides having a heavy tax burden, the companies that act in the legality must face competitors that, do not to pay or pay just a little tax. These evaders can offer lower prices and they benefit from higher profits. Thus, the tax evasion turned into a competitive advantage in Brazil. It can determine the success or the failure of a business.

About 60% of cattle slaughtering in Brazil are clandestine, made at municipal slaughterhouses and for small and medium butcher shops. This means that, of the 26 million heads abated annually, at least 15 million don't pay any taxation. The damages for the public coffers are visible: the meat is exempt from IPI but is taxed in 20%, considering ICMS and COFINS. For the organized companies, the equation translates itself into a very serious damage.

The recent history of the meat sector shows clearly up to where the damage provoked by the tax evasion can get. The ilegal market made disappeared all the great foreign meat companies. Pressure by the remaining ones, the government of the State of São Paulo tried to restraint the defraudments. One of the providences demanded the installation of electronic devices in the slaughterhouses. The idea was to count each abated animal, what would facilitate the calculation of the due tax. In a very short time, however, 45 of the 80 meat companies from São Paulo transferred to States as Mato Grosso and Goiás, where they also benefit of smaller brackets of ICMS.

Similar situation can be verified in the market of chickens, whose annual sales arrived at 6,8 billion dollars last year. Of the total of 1,6 billion tons of chickens produced, a little more than a third don't get inspected by federal sanitation authorities. This is a serious indicative of tax evasion. Little sanitary concern generally implies little or no fiscal concern. Due to the tax evasion, about 200 million dollars in taxes were not picked up in 1995, a year considered a record for sales of the sector.

Not by chance, the feeding section is considered the lowest taxpayer in Brazil, according to research made among 214,000 companies of all the activity branches. The work, presented in the final report of the Parliamentary Commission of Inquiry of the Fiscal Evasion, supported by the Senate in 1994, shows that in the feeding sector 98% of IPI were not paid by the companies. Following close behind are the: chemical (59%), textile (54%) and metallurgist (51%). That evasion, according to the technicians of the Ministry of Finance, is attributed to pure and simply fraud, the inadimplency² and, also, the fiscal elision.

Regarding elision is framed a range of legal resources for the non payment of tributes. Also known as tributary planning, that practice is controversial. There is a very fine line between the fiscal elision and the tax evasion. Among the entrepreneurs, this is seen as middle of self-defense. They say that "the tributary planning is a weapon of the organized companies to defend themselves against disloyal competition from fraudulent ones".

At first sight, the numbers of the research seem exaggerated. Actually, as happens with most statistics in Brazil, the indicators are imprecise. For a long time it was supposed, with basis in estimates of the revenue office, that for each each dollar collected in tax another one would correspond in tax evasion. The Federal Revenue Secretary refutes this supposition. It is alleged that this is idea of easy assimilation which turned into a thesis. Perhaps a more consistent approach is the one made by the Secretary of Finance of São Paulo. Of the forecast collection for 1995, the Treasury of São Paulo obtained 67%, an evasion of at least a third of the potential revenue.

In 1995, the sum of the federal tributes reached 84 billion dollars. Added to state and municipalities tributes would get to 173 billion dollars. Considering the relationship 1 for 1 was true, it would mean that other 173 billion dollars went to the parallel accounting. This is a high figure. If the thesis of the third is adopted, it would drop for 57 billion dollars, what is still considered a lot. To find the exact figure is almost impossible, but, in any way, some data help to show that the evasion is high. According to the Secretary of Federal Revenue, about 2,5 million companies for more than 5 years don't pay tax of income. Among them, 99% would owe some money to the Federal Revenue.

Another question is the enormous concentration of the payment of taxes in Brazil. There are few taxpayers and the ones pay, pay a lot, because the brackets are considered very high. Recent research shows that the 30,000 larger Brazilian companies (revenue upper to 1,8 million dollars) are responsible for 85,20% of all the collection of the federal government. Moreover, the 150 largest taxpayers pay 50% of practically the whole of income tax, and 70 companies pay half of the IPI. The concentration degree doesn't reflect the reality of the generation of national income. The participation of these great taxpayers' revenues in GDP is much smaller than its tributary obligation.

The same happens regarding the tributes collected by the States. In São Paulo, where 20 billion dollars is collected each year in taxes, 50 major taxpayers take part in 30% of ICMS. Opening a little more the fan, it can be verified that the 1600 larger companies participate with 60%. On the other hand, 344,000 companies contribute with just 15% of the collected.

For the true tax dodger, the objective is to pay nothing in taxes. In that case, s/he simply stops emitting the receipt. One of the most common form of tax evasion, however, is to use half receipt: the tax dodger registers in the receipt the physical volume of the goods, but with a smaller value, on which are levied the taxes. Even in the case of being caught in the act by inspection, there is no problem, because of the difficulty in verifying the true price of of the product. The question is that who sells with half the receipt also purchases with half the receipt. Thus, the production costs and the sales prices in semi-illegality becomes unbeatable. A consequence of that combination is that the companies of the informal pole get to place its production in a very low price compared to its competitors. Besides the pain of those who pays taxes, tax evasion also degrades the distribution chain.

An identical situation is experienced by the garment sector. Equipment such as sewing machines, for example, are relatively cheap. Thanks to this, thousands of small companies appeared in the last years. Ironically, the restructuring and the shrinking promoted by the great companies of this sector ended, in a certain way turning against them. According to estimates, a little more than 35% of the national production of garment are informal: of the 840,000 tons of raw materials supplied annually by weavings, only 540,000 reappear in the sales of the legalized companies.

The substitution of the institutionalization of the roguery for the instutionalization of the contribution necessarily goes by a revision of the charged brackets. It is not to continue infringing the call Law of Lafer, formulated by the American economist Arthur Lafer, from the University of Stanford. " An unit more in tax can result in a n unit less of revenue ", says the law. James Mead, Nobel prize of Economy in 1977, still reinforces the Lafer thesis in a simpler form. It is " intelligent to tax less on more", Mead says. The question is summarized in finding a taxation level capable to be bearable for the group of the companies and to make tax evasion uninteresting the tax evasion without damage for collection.

The Brazilian tributary system, in general terms, can be considered: obsolete, too complex, structurally unfair, characterized by high tributary burden, not propitious to harmonization with other tax systems and an inductor of evasion, even the unintentional one.

The simple existence of tributes collected in "cascade", for example: PIS, COFINS, IOF, CPMF, can be considered effective exports barriers once taxing the national production and non taxing the foreigner ones places the first one in clear disadvantage in relation to the imported product. It is harmful for the competitiveness of the national production.

The productive chain is onerated simultaneously with two taxes on the same generating fact: IPI, which is payable up to a certain point, and ICMS that is payable in the whole chain. This makes Brazil, possibly, the only country in the world that has two value added taxes, one under the federal government's competence and another of States.

A tax, whose effects surpass the border of the federated unit should have its competence attributed to the federal government. The ICMS, for having its competence attributed to States, has been an instrument of "fiscal war" among States, which grant fiscal benefits with the objective of developing its industrial park. That industrial decentralization could be considered positive for the country if, with the decrease of the revenue of the developed states, the other states had increased its revenues. What happens, however, is that the revenue received by the states that grant such benefits is a fictitious revenue. The same taxpayer that pays ICMS for that State receives back, as an incentive, almost all of the tax paid as a financing, in a long run, without interest and without indexation.

In the decentralization of the development, done by means of tributary artifices, what decreases is the private cost, increasing, obviously the social cost, called "Brazil’s cost", compromising clearly the competitiveness of the national production.

Another subject to be considered is the current low taxation on income in the Brazilian tributary system. There is a much higher taxation on the consumption than on the income. It is easier to tax consumption, once all the consumers are included, but to tax income is more difficult, not only by the characteristic selectiveness of that taxation but, mainly by existing elevated concentration of income in the country.

Regarding the tributary burden it can be said that there is not a high tributary burden or low. Either the tributary burden is fair or unfair. To get this definition it is necessary to consider the other side of the public sector: the one that renders services to the society. If the rendered services are satisfactory in amount and quality terms, there is not the sensation of a high tributary burden. However, analyzing the Brazilian tributary burden in function of the rendered public services, it can be considered very high.

Another fact to be considered in the analysis of the tributary burden is the tax evasion level. The nominal burden, the one that it is in the tributary legislation, is larger than the one that indeed enters the public coffers.

Another criticism that is made of the Brazilian tributary system is regarding the regressiveness of it. A system is considered progressive if its main collection basis come from direct tributes. In Brazil about 70 to 75% of the outturn is based on indirect taxes, which are easier to be collected. The Brazilian Income Tax is also regressive because its collection basis comes almost totally from wages and not from profits or dividends.

The abrupt fall of the inflation provoked by the Real occasioned an increment in the collection, in real terms. The need of adoption of concrete measures to consolidate in an effective and responsible way what indeed matters to facilitate the preservation of the sustained growth of the Brazilian economy and the significant and continued reduction of the expressive fiscal unbalance of the public sector completely as a whole is evident.

In addition, new changes should happen in the wake of a very accelerated process of transformation in the economic, political and social spheres: the Globalization, requires integration agreements that propitiate a harmonization among several tributary systems.

Another important element is the need for integration of the tax collections among the states. The existence of separated fiscalizations of the federal government, state governments and even the municipalities propitiates, given the structural disharmony, decrease in the revenue with an increase of tax evasion.

The national tax reform is urgent and necessary, specially considering the unanimous consciousness of the strong stress on the taxpayers, reflecting an impositive burden derived from serious distortions and badly distributed, even in its philosophical conceptions as in the economic and social aspects of fiscal justice.