Brazil’s increased IOF tax could prevent 7 million from falling into poverty – FGV Social

RIO DE JANEIRO, BRAZIL – The new rates of the Tax on Financial Transactions (IOF), paid on transactions such as credit operations, foreign exchange, loans, insurance, or financial securities, started to be valid on Monday (20).

Those who travel know it well because they pay the tax on transactions with credit card purchases abroad.

The goal is that the rates will be in effect until December 31. The amounts collected will help fund the expenses with Auxílio Brasil (aid for the poor), the federal government’s income transfer program with which the federal government intends to replace Bolsa Família [Family Aid] (government program to help the poor).

A projection by the Getúlio Vargas Foundation (FGV Social) concluded that, with the Bolsa Família alone, Brazil’s poverty would go from 12.98% of the population living in poverty to 16.1%, which would represent 35 million people.

FGV-Social classifies the IOF as a distorted tax and believes that the ideal would be to look for other sources and reduce spending. The Auxílio Brasil would need more resources for two reasons: to expand the coverage of beneficiaries, which should reach 17 million families (currently, there are 13.9 million).

The new program demands more resources than the current Bolsa Família because the beneficiary base increases, from 13.9 million families to about 17 million. The expansion is based on a decision by the Federal Supreme Court (STF). Besides this, the average value of the benefit will increase from R$189 to R$300.

Economist Marcelo Neri, from FGV Social, understands that the measure is essential but defends that the government should look for other sources to fund the initiative. “The government is between a rock and a hard place because, without the aid, the number of poor people would increase a lot. But reducing expenses is better than increasing the IOF. In this case, it is just as important to design a good and sustainable funding source,” he analyzes.

The government needs the program to be implemented still in 2021 because legislation prevents the implementation of such a program in an election year.

The Presidential Office has signaled that the increase in the IOF is a temporary measure and that the resources to fund the future of Auxílio Brasil depend on fiscal space that will be sought in the approval of the Constitutional Amendment Proposal (PEC) of the Precatórios [court-ordered federal debts] and the reform of the Income Tax (IR), with the forecast that the measure will allow the taxation of dividends.

Professor of Economics at Ibmec-RJ Christiano Arrigoni understands that the government’s decision is natural. Still, he is not sure that the rate will return to the original level by the turn of January 2022.

“The maintenance of this new level is not a zero risk event. in the short term, the government has few alternatives, there is no fiscal space, and it needed to create a funding source,” says Arrigoni. “But the ideal would be to have a better debate with society, with Congress, and find a way out that imposes the reduction of less meritorious expenses.”

“There is a consensus among economists that the IOF is a distorted tax for generating diverse side effects on the economy. The risk of an extension cannot be ruled out because the two issues, the PEC of Precatórios and the IOF reform, need to be approved by the Legislative branch, which can reject them,” assesses Arrigoni.