In Brazil, Concentration of Wealth May Be Even Greater Than That of Income

RIO DE JANEIRO, BRAZIL – It happened about two months ago in the state of São Paulo: the wife and children of a billionaire family received donations from the patriarch – still alive – in the amount of R$48 billion and did not pay any taxes.

The procedure is known among tax lawyers: remittances in kind or disguised as capital contributions are made to companies in tax havens to then return to the country in the form of donation of these companies’ shares to heirs. As a result, the family averted paying R$2 billion of state tax on donations and inheritances (ITCMD).

Despite low collection in virtually all countries where this tax exists, the rates are much higher than in Brazil. In Japan, it can be as high as 55%, and 50% in South Korea. France and USA tax at 45% and 40%, respectively. It is also true that, in some countries, the majority of assets are exempt: in the USA, assets with a value below US$11 million do not pay inheritance taxes.

In Brazil, the rates range from 4% to 8% between states, as do exemption brackets. For inheritances of a single property, in general assets of up to R$70,000 are exempt. In many cases, heirs of assets worth R$250,000 are subject to the maximum tax rates, while the super-rich have countless estate planning strategies at their disposal to avoid the payment of tax. It is worth noting that before 1988, and particularly before 1965, inheritance tax rates in Brazil ranged from 35% to 65%, depending on the state.

In the book Capital in the Twenty-First Century, Thomas Piketty suggests that the concentration of wealth may reach extreme levels in the future. The central argument is based on what he called the “fundamental law”: the propensity for the rate of capital return to exceed the rate of economic growth. Therefore, it is enough for people who live on capital income (rentiers) to save a small fraction of their income for their wealth to grow faster than the overall economic income. As a result, rentiers would absorb a growing slice of what is produced by society.

In fact, in a recent report assessing elites in 32 countries, economists Casas and Cozzi define our elite as “rentier”: they hold great power and contribute little to the country’s development. These are key issues in assessing how a society works and whether we can consider it fair or, to some degree, meritocratic.

Another historical trend pointed out in Piketty’s book is that great interventions in the distribution of income and wealth would only be possible in times of social upheaval such as wars or economic crises.

After 60 years of debating its tax system, France introduced its income tax to finance the 1914 war effort. In England, during the First World War, there was a sharp increase in the tax rate on profits, which reached 80%. It was also soon after the 1929 crisis that U.S. President Roosevelt sharply increased the tax burden and the progressive income tax in the U.S.: the maximum rate reached 75%.

Since the start of the Covid-19 pandemic, the Brazilian government has been discussing how to fund social benefits to mitigate the shock suffered by Brazilians affected by the crisis. It is known that income inequality in Brazil is tremendous: while the wealthiest 5% take 50% of national income, the other 95% of the population share the remaining 50%. Other papers have documented that, contrary to what was believed, the concentration of income at the top did not decrease during the PT’s (Workers’ Party) administrations.

It is plausible to assume that the concentration of wealth is even greater than that of income, not only because of the life-long savings effect but also because wealth can be passed on from one generation to the next. How much greater? It is unknown. Estimating wealth is more difficult and there are fewer data sources. Household surveys used to estimate the income of individuals do not collect data on the wealth of respondents and underestimate the income of the wealthiest. Therefore, the most common way to overcome this problem is to use tax data which, in turn, is highly protected in Brazil.

One way to better understand wealth distribution in Brazil would be to use inheritance tax data to apply the “inheritance multiplier” method. The concept is that the dead are a good reflection of the living, and inheritance is a picture of the wealth of the deceased. By reconsidering the distribution of inheritances using the reverse of the probability of death, one obtains an approximate wealth distribution.

Brazilian states keep individualized files with the value of inheritances and number of heirs. With the help of COMSEFAZ, a committee comprising state Treasury Secretaries, some researchers are trying to collect these data and six states have already contributed. Unfortunately, they represent only 20% of what is needed for a nationally representative sample. Moreover, data on gender and age of the deceased, key to estimating specific mortality rates, are discarded by administrations because they are irrelevant in tax calculation.

By maintaining taxpayer tax secrecy, access to this data would narrow the scope for intuition in the debate about inequality and estate taxation in Brazil. A study published in the American Economic Review in 2015 found that survey participants now have a favorable opinion on inheritance taxes once they are told who actually pays the tax – the super rich.

Although the low level of trust in the government constrains support for redistributive policies in the country, Americans seem to see the estate tax as a useful tool to prevent the persistence of extreme levels of inequality. In an unequal country like Brazil, the debate on distribution and revenue potential -be it a new estate tax or the redesign of the inheritance tax- must be based on data.

Below are some proposals in this direction:

Integrating databases with data on the deceased, such as: gender, age, schooling, etc.
Release of anonymous microdata from Individual Income Tax returns and
creating an additional questionnaire on assets in the IBGE (Brazilian Institute of Geography and Statistics) household surveys.

Source: Folha de Sao Paulo