What’s Going On With Brazil’s Plan To Exempt Most People From Income Tax?

Brazil is advancing a major tax reform that could reshape who pays income tax and who does not. The government’s proposal, now moving quickly through Congress, would exempt monthly salaries up to 5,000 reais ($900) from income tax starting with 2026 earnings.

Officials estimate this would leave nearly 87 percent of Brazilians free of monthly income tax obligations. Finance Ministry officials argue that the plan reflects fairness.

Most Brazilians already pay heavy indirect taxes on consumption and payroll, which can absorb almost a third of their income. Meanwhile, the wealthiest contribute relatively little through income tax.

Data show the top 0.5 percent of earners concentrate about 1.5 percent of national income while paying an effective income tax rate of only 2.5 percent.

To rebalance this, the bill introduces a new “minimum tax” on very high incomes. Anyone earning more than 600,000 reais ($110,000) annually would face a progressive surcharge, capped at 10 percent for those making over 1.2 million reais ($220,000) .

Government estimates show that just 141,400 taxpayers fall into this group, less than 0.2 percent of the total. The bill also creates a 10 percent withholding tax on dividends remitted abroad.

Together, these measures are expected to offset the 25.84 billion reais revenue loss from exempting lower salaries, while raising 34.12 billion reais from taxing higher incomes and cross-border dividends.

Officials project this will keep public accounts balanced and even increase revenue in the following years. The Chamber of Deputies has already approved urgency for a vote, which may take place within days.

If passed, the Senate must still confirm the reform. Business leaders warn that higher capital taxation could discourage investment and reduce productivity, while the government maintains that only a tiny elite will be affected.

The debate goes beyond numbers. It raises a central question for Brazil: should the tax system ease the burden on millions of ordinary workers by shifting costs to a small group at the top?

The answer will define the country’s economic path and its approach to inequality in the years ahead.