Brazil´s Wealthy Must Pay More Taxes for Inequality to Drop, Says USP Study

RIO DE JANEIRO, BRAZIL – The proposals of the Jair Bolsonaro government’s economic team to create a new social program in 2021 are ” virtually worthless” in reducing income inequality because they spare the wealthiest part of the population. This is the conclusion of a study by FEA-USP (School of Economics, Business, and Accounting of the University of São Paulo).

To reduce inequality the government would have to increase the tax burden on the wealthiest and remove the spending cap rule, which freezes public spending for 20 years, allowing only correction by inflation, say the researchers.

The study conducted by the Center for Research in Macroeconomics of Inequalities (MADE) analyzed three proposals considered by the government in recent months to finance the Renda Brasil or Renda Cidadã (Citizen Income), which could expand and replace the Bolsa Família (Family Grant) in 2021.

The researchers also designed four alternatives to finance what they consider would be a more efficient program in reducing inequalities. All of them provide an increase in the Income Tax paid by the wealthiest 20%, but would only be feasible without the spending cap.

As there is no Budget to extend the emergency aid to 2021, the Bolsa Família will be the main tool for income distribution in Brazil next year. The government is looking for ways to expand the program while respecting fiscal rules, including the cap.

The first proposals of Minister Paulo Guedes’ team to expand the Bolsa Família were to unify programs. The plan was to end the salary bonus, the disability insurance, the family allowance and the Farmácia Popular (access to medicines through subsidized prices) and use the funds from these programs to expand the Bolsa Família.

Other solutions considered were the freezing of pensions and retirement for two years and an end to the readjustment of the minimum wage to replace inflation losses.

None of the proposals pleased Jair Bolsonaro because they affect popular programs. The President went so far as to say in public that he would not “take from the poor to give to the very poor” and threatened to expel anyone who would insist on the proposal from the team.

On Sunday, November 29th, Bolsonaro renewed his “red card” threat to anyone who mentions the Renda Cidadã.

The researchers conducted simulations to understand the impact of these measures on inequality. There were three scenarios:

1. To zero the salary bonus, closed-insurance benefit, and family allowance to increase the amount of the Bolsa Família by 30% and add three million beneficiaries;

2. To end the minimum wage readjustment for two years (which would affect readjustments in salary, disability insurance, unemployment insurance, family allowance, BPC – Continuous Cash Benefit, and the retirement floor) to increase the Bolsa Família by 30% and add 20 million beneficiaries;

3. To freeze pensions and social security benefits for two years to increase the amount of the Bolsa Família by 30% and add 56 million beneficiaries.

The study concludes that proposals 1 and 2 do not affect the income of the wealthiest 10%. As it limits pensions and benefits, proposal 3 somewhat reduces the income of all social classes, but the reduction is lower for the wealthiest.

In the best scenario (proposal 3), the Gini index, which measures income concentration, would drop only by 2.3%, an impact considered virtually zero by researchers. The index, from 0.557 in 2018, would drop to 0.544 under this scenario. The higher the index, the greater the gap between wealthy and poor.

Brazil’s index is similar to that of countries like Mozambique and Belize. It is behind neighbors such as Argentina (0.414), Bolivia (0.422) and Paraguay (0.462). Countries that are a reference in income distribution, such as Norway and Iceland, have an index close to 0.265.

Currently, the Bolsa Família pays an average of R$48 per person. The study offers four proposals, increasing this amount to: R$125 monthly, for the poorest 30%; R$150 monthly, for the poorest 30%; R$125 monthly, for the poorest 50%, with the end of the salary bonus, closed-insurance benefit and family allowance; R$125 monthly, for the poorest 50%.

All these proposals would be funded by increasing income tax (IR) for the wealthiest 20% of the population.

The study divides these wealthiest 20% into four groups: the wealthiest 1% (average taxable income of R$20,938 per month); next 4% (average taxable income of R$7,368 per month); 5% directly below (average taxable income of R$3,869 per month); and 10% completing the group (average taxable income of R$2,424 per month).

The higher the income, the greater the proportional contribution to the income tax to fund the expansion of the Bolsa Família would be. This rule is already in place, but the rates distribution is considered insufficient.

End of income tax deductions:

Rodrigo Toneto, an economist involved in the study, states that an increase in the income tax rate would not be needed, but rather an end to deductions for expenses such as health insurance and private schooling. Minister Paulo Guedes supports the end of exemptions.

In the first proposal, the most modest drawn by the researchers, the wealthiest 1% would pay 10% more in income tax. As a result, the Gini index would drop to 0.526 – a 5.6% reduction.

On the fourth proposal, the one with the greatest impact on social inequality, the wealthiest 1% would pay 15% more IR, reducing the Gini index to 0,508 (-8,8%). At this level, Brazil would reach an inequality index close to that of Colombia (0.504), according to the researchers.

In the study’s four proposals, the additional contribution by the group with an average income of R$2,424 would not reach 3%.

Review of the spending cap:

The study admits that the four proposals are not feasible if the spending cap is maintained. Because of the law, even if the government were to raise taxes from the wealthiest, it would not be able to increase spending. Researchers therefore advocate reviewing the law.

“We don’t want to focus our discussion on the end of the cap, but it is understandable that a clear-cut cash transfer program to tackle social inequality requires a revision of the rule,” said Toneto.