RIO DE JANEIRO, BRAZIL – The Brazilian tax system, regarded as complex, bureaucratic and outdated, could generate billionaire gains for society only by redesigning the tax collection structure.
Calculations prepared by the Federation of Industries of the State of Rio de Janeiro (FIRJAN) show that the two tax reform proposals – under discussion in Congress – have the potential to generate 300,000 jobs per year and increase consumption by up to R$122.7 billion (US$30.67 billion).
The work was based on a methodology developed over a year and does not anticipate changes in the tax rates.
In order to reach the result, both Constitutional Amendment Proposal (PEC) 45, based on a study by economist Bernard Appy, and PEC 110, made by deputy Luiz Carlos Hauly, were examined. The administration has not yet submitted its formal proposal.
“Our goal was to assess the reform’s impact on the population’s well-being through income, consumption and job creation,” says FIRJAN’s Economy Manager, Jonathas Goulart.
According to him, it was also important to understand the effects of creating a single value added tax including federal, state and local taxes, as opposed to one embracing only federal taxes and another for state and municipal taxes (ICMS and ISS).
“We perceive a significant difference. If everything is included, the gain in consumption is three times greater”, says Eduardo Eugenio Gouvêa Vieira, president of the federation.
Without including states and municipalities in the new VAT, the increase in consumption drops to only R$39 billion, according to FIRJAN. The gap between the numbers, Vieira notes, is proof that half a reform makes no sense.
“Therefore, the governors need to understand that this is income for them as well. It’s a boomerang effect,” says the executive, pointing out that “half” a reform is terrible for the Brazilian population.
VAT
On average, the two proposals in Congress bring similar gains for the population (around R$122 billion), since they provide for the introduction of a single tax in the form of the Value Added Tax (VAT) used abroad.
The difference is that, in the case of Deputy Appy’s proposal, the states may have differentiated rates; and in Hauly’s, the rate is the same throughout the country, explains Goulart.
“The simulations show that all regions would have consumption gains. But some may have less than others,” says the manager of FIRJAN. He also calculated what the impact would be if there were a partial exemption from payroll taxes.
The simulation foresees a 40 percent cut, which would be included in the single tax. In this case, the gain would increase from R$122 billion to R$136 billion.
Greater potential
Nevertheless, Appy and Hauly claim that the tax reform may have a far greater impact than FIRJAN expected.
“At first glance, I see growth between 5 percent and 6 percent of GDP (Gross Domestic Product),” says former deputy Luiz Carlos Hauly. He explains that his proposal reduces the tax burden and will release something around R$640 billion in product prices.
“Brazilians will have more money for consumption because there will be a reduction in the burden on families.”
For Appy, the reform’s effects on the economy should be presented next week, but he believes it will be greater than FIRJAN’s calculations. According to him, his proposal aims to reduce bureaucracy, tax litigation, and investment costs.
It will additionally increase economic competitiveness by reducing the costs of exports and domestic production in relation to imports. “But the main thing is that it will remove allocative distortions (generated by tax incentives) from the economy.”