New fiscal framework encourages government to increase tax burden, experts say
The new fiscal anchor states that government spending will be limited to 70% of revenue growth achieved in the previous 12 months. For Guilherme Di Ferreira, deputy director of the Tax Law Commission of the OAB–GO, if expenses depend directly on how much the government collects, there is an incentive for the public administration to seek to increase what enters the National Treasury through the creation of new taxes or raising current levels.
“So that the government can fulfill its obligations and its promises, it has two options. Through (increasing) taxes or by streamlining the administrative machine. As there is no movement to reduce the machine, then, yes , everything will be focused on the tax part”, he says.
The government framework also promises to zero out the public deficit (difference between what the Executive collects and spends, except for debt interest) next year and close the accounts in black in 2025 and 2026.
The targets for the so-called primary result demand that government revenue increase in the coming years, attests to the most recent edition of the Macro Bulletin, from the Getulio Vargas Foundation’s Institute of Economics (FGV IBRE). “Achieving the primary result targets, in the absence of faster economic growth, requires, therefore, an increase in the recurring tax burden”.
When presenting the outline of the fiscal framework at the end of March, the Minister of Finance, Fernando Haddad, admitted that the government will have to collect more to make the proposed adjustment of public accounts feasible. But he said that these resources would come from sectors of the economy “overly favored over the decades” by tax incentives or by taxation of activities not yet regulated, such as the internet betting market.
“The government’s challenge will be to increase the collection base without further burdening the productive sectors that historically comply with their tax obligations”, evaluates Eduardo Natal, partner at Natal & Manssur Advogados and president of the Tax Transaction Committee of the Brazilian Association of Advocacia Tributária (ABAT).
Since then, the government has also announced the end of the import tax exemption for the purchase of products of up to US$ 50 by individuals, but withdrew after the negative repercussions.
Without cuts
The government also proposes an “anti-cyclical mechanism” for public accounts. Regardless of income, he will be able to spend between 0.6% and 2.5% more than in the previous year, discounting inflation. The rule is looser than the spending cap, which limits real spending growth to zero, in practice.
According to Haddad, the minimum floor of 0.6% for expenses would serve to avoid an abrupt cut in expenses at times when the economy slows down. The ceiling, in turn, would prevent unrestrained spending in good times.
But for Di Ferreira, setting a minimum floor for spending even when the country is stagnant or in recession is bad. “The focus of those who enter to lead the country should be fighting to reduce public spending”.
Raone Costa, chief economist at Alphatree, agrees. “It’s a promise of fiscal adjustment and we didn’t have any kind of measure to cut expenses announced. On the contrary, a series of measures to increase expenses were announced. Possible promises of an increase in the tax burden were announced. The idea is that the fiscal adjustment is an adjustment with more spending and more tax burden, considering that in Brazil the tax burden is already quite high”, he criticizes.
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“Backfire”
Authors of the article on FGV IBRE’s fiscal framework, Manoel Pires and Carolina Resende, state that the government should pay attention to the impact of tax measures on the productivity of the Brazilian economy. “It is important to observe the long-term impact of the increase in the tax burden, as the tax generates a deadweight loss on production and a series of distortions on the economic system”.
This means that the increase in taxes on certain sectors of the economy tends to raise government revenues to a certain extent, explains Di Ferreira.
“From the moment the taxation increases, the consumer will think: ‘is this essential for me? If it is not essential, I will not buy it’. And even if it is essential, if the person is unable to afford it, whether a businessman or a consumer, he will give up using that product or service. If you increase the tax too much, you reach the limit that, despite the forecast for collection, as the cost has increased, there will be a reduction in consumption and, thus , will not have all that revenue that the government expected”.
By Brasil 61
