CONSUMPTION TAXES IN BRAZILObjectives, Constraints, Challenges

“Tributação sobre Consumo no Brasil”GDT, Brasília

20-23 de novembro de 2007

Alexandrine Brami CelentanoSciences Po Paris, GVCenn FGV-SP

15.700 Km de fronteiras15.700 Km de fronteirasterrestresterrestres

7.300 Km de fronteiras7.300 Km de fronteirasmarmaríítimas timas

PopulationPopulation: 182,5 M: 182,5 M

8,5 milhões de km8,5 milhões de km22

Source: IBGE

BRASIL

PIB 2005: 796 bi $

PIB per capita: 4323 $

Growth of GDP: 3,2%

Tax collection: 298 bi $

Tax burden: 37,37%

Source: IBGE and SRF

UNIONfederal

5572 MUNICIPALITIESlocal

26 STATES + DFstates

Subnational

ARCHITECTURE OF BRAZILIAN FEDERALISM

SALARIES

2,15

5%25%70%TOTAL

OTHERS

1,25

COMERCIO EXTERIOR

25,16

2,7

PROPERTY21,7

INCOME AND PROFITS

COFINS 12% PIS 2,56%

ISS 1,8%ICMS 21,4%IPI 3,6% CIDE 1%42,8%

GOOD AND SERVICES

MUNICIPALESTADUALFEDERAL

COMPETENCE

CONSUMPTION TAXES (% Tax Base)

MAIN DESIRABLE OBJECTIVES OF TAX POLICY IN BRAZIL

1. Ensuring sustainable fiscal position, through low or declining public deficits anddebt ratio

2. Promoting revenue mobilization, to financeefficient spending programs, especially in thesocial area and in infrastructures

3. Removing, to the extent feasible, distortivefeatures of the tax system, to promoteeconomic efficiency and increase growthpotential

MAIN DESIRABLE OBJECTIVES OF TAX POLICY IN BRAZIL

MAIN CONSTRAINTS FACING POLICY MAKERS

IN THE PURSUIT OF THESE OBJETIVES

1. Structure of the economy2. Trade liberalization3. Increased financial openness4. Large income disparities5. Fiscal decentralization6. Administrative weaknesses

MAIN CONSTRAINTS FACING POLICY MAKERS IN THE PURSUIT OF THESES OBJECTIVES

HOW IS BRAZIL COPING WITH THE PROBLEMS OUTLINED ABOVE?

From 1988 to now, only moderate reform occurred, limited to the boundaries of existing institution

Instead of forging a new pact around tax, all actors maneuvered within the boundaries of previous tax institutions to face challenges as they emerged

Pattern of Tax Policy in Brazil

Pattern of Change in Brazilian Tax System

As a surprise, minor adjustments both within inherited institutions and at their margins did allow significant policy changes

• Major expansion of tax revenues that brought Brazil to developed-country levels of tax, and

• Introduced a number of extremely modern tax practices (notable improvements in the administration and rationality of certain taxes).

In the context of fiscal adjustment and market liberalization, such changes were a major priority and represented important achievements.

BUT: Expanded revenues were possible only - through tightening the screws on those handles that government could easily access, - and these handles were not always the most appropriate to a modern, growing economy.

The result was that the increase in the tax burden occurred in a way that was inefficient and inequitable.

Increasing Tax Burden

EVOLUTION OF TAX BURDEN

0

5

10

15

20

25

30

35

40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

TOTALUNIÃOESTADOSMUNICÍPIOS

1990 1991 20011992 1993 2002 20052004200320001994 1995 1996 1997 1998 1999

TOTAL 1998-2005 = +7,63%

% P

IB

1990

TOTAL = +7,63%

UNION = +5,77% 76%

STATES = +1,84% 24%

MUNICIPALITIES = +0,02%

29,74%

37,37%

Source: SRF

TAX BURDEN: A COMPARISM (2003)

LATIN AMERICA

South Europe

Occidental Europeand CanadaBRAZIL

It is practically a consensus that the Brazilian domestic taxation hinders both the insertion of the country in the global economy and economic growth:

- It imposes a competitive disadvantage to the Brazilian production sector, in both the international and the domestic markets;

- It distorts the allocation of resources in detriment of economic efficiency; - It increases the cost of investment by taxing capital goods; - It is excessively complex and inappropriate for international harmonization; - It facilitates or even stimulates evasion, causing inequity and unequal

competition; - And it is suitable for predatory fiscal competition among states, the so-called fiscal

war, that brings about conflicts in the federation- Tax and Judicial Insecurity for private sector

The increase in the tax burden came at the cost of economic inefficiency

MAJOR CHALLENGES FACING POLICY MAKERS

1. Understanding Brazilian Version of “VAT”2. Simplifying Tax Legislation and Regulations3. Monitoring and Reducing Tax Incentives4. Strengthening Tax Administrations

MAJOR CHALLENGES FACING POLICY MAKERS

1. Brazilian version of VAT

2. Introduction and expansion of cascading taxes on turnover

3. Fragmented and regressive system of Consumption Tax

Consequences:- Administration and compliance costs became excessive; - Distortions imposed on the allocation of resources and on competition

grew immoderately.

Understanding Brazilian Version of VAT

Associated with regional tax harmonization (Mercosur), tax simplification can:- Reduce tax cost, for both public and private sectors- Reduce national and regional tax competition for FDI- Strengthen Tax compliance

Consensus about:- The very necessity to converge to a simpler model, with fewer taxes and one

principle of taxation, thereby making tax system leaner and more enforceable.- Reform proposal must target both sales taxes and contributions

Lack of consensus about: - What is desirable scope for further simplification and standardization? - How much time is this process likely to take? - Harmonization or Recentralization?- Is devolution of power to tax desirable (economically)? Possible (politically)?

Conflicts of interpretation: - The spirit of the ICMS reform- The very effects of the sales tax reform

Simplifying Tax Legislation and Regulations

1. Too many tax incentives- Limited economic benefits of tax incentives, as well as of their shortcomings- Relations among and between federal units reveal shift in the federal pact

2. Monitoring and reducing tax exemptions and incentives- Recent program of fiscal consolidation has included streamling of tax

exemptions. - Executive power has also introduced annual tax expenditure budgets, to monitor

the cost of tax incentives in term of foregone revenue. But: - Further judicial and institutional reforms are also needed, to allow for quicker

and more effective resolution of tax disputes and to reduce uncertainty- Need for law enforcementQuestion: What should be the key reform priorities in this area? How can they be

advanced?

3. Good use of tax exemptions

Monitoring and Reducing Tax Incentives

1. Improving Local TaxationThe objective should be to make municipalities more self-reliant by collecting their own taxes.

How?- Mechanisms habe been devised to link tax-sharing formulas to fiscal effort by local

governments, but they are relatively demanding in terms of informational requirements- Intermunicipal and inter-governmental cooperation required

2. Improving taxpayer servicesBrazil has embraced innovations in tax administration. Many tax administrations already provide

taxpayer services online (e.g., dissemination of information, tax filling).

Question: What is the scope for further modernization and automatization?

3. Strengthening collection enforcement, including through judicial and legal reforms

Efforts to strengthen and modernize tax administration have to be motivated not only by revenue-raising objectives, but also by a growing recognition that improved tax enforcement increases equity and, by leveling the playing field for business, promote efficiency in resource allocation.

Strengthening Tax Administrations

KEY PROBLEM

To renegotiate this tax would require a pact among various states.

1. A key problem is the issue of uncertainty in the context of fiscal crisis.

As Fernandez and Rodrik (1991) show, uncertainty about future benefits can create a status quo bias.

It is not that the states or some group of states are too powerful, it is that neither the states nor the federal government want to run the risk of losing money.

2. An additional problem with a new pact around tax can be found in Congress.

3. Additional civil society actors find their way into the negotiations and further complicate a new pact.

ICMS: An impasse issue?

Conclusion:

Constructing Basis for Tax Reform

Comparing the dynamic process of change in Tax Reform and the Fiscal Responsibility Law

1. Fiscal Responsibility Law represented the culmination of the long process of forming a new federal arrangement.

2. Tax reform process: occurred slowly and gradually, but it did not rest on a new pact, nor did it lead to entirely new rules of thegame.

Question: What can make tax reform successful in terms of increasing capacity and accountability?

Obrigada pela atenção