Brazil’s stock market rallied after the new economy minister vowed to drastically lower the country’s tax burden and reform its generous social security system, but whether those pledges become reality remains to be seen.
Paulo Guedes, an advocate of free markets with a PhD in economics from the University of Chicago, said January 2 that he intends to lower the tax burden from 36 percent of GDP to 20 percent. Guedes was appointed by Jair Bolsonaro, who was sworn in as Brazil’s president January 1. Bolsonaro, a right-wing populist member of the Social Liberal Party, took 55 percent of the vote in a runoff election October 28 against the candidate of the leftist Workers’ Party.
In a speech in Brasília after his swearing in, Guedes said he will concentrate on reform of the state pension system, privatization of government-owned enterprises, and the simplification and reduction or elimination of taxes. The economy needs “more Brazil, and less Brasília, with an economic opening,” Guedes said.
Bolsonaro and Guedes have vowed to simplify Brazil’s byzantine tax code by combining a mishmash of federal and state consumption taxes into a single levy similar to a VAT.
Guilherme A.G. Gabrielli, a tax lawyer with Bichara Advogados, said Guedes has come out in favor of setting the general corporate tax rate at 15 percent, down from 34 percent currently. The top marginal rate for individual taxpayers would be reduced from 27.5 percent to 25 percent for the highest earners, with rates of 15 percent to 20 percent for everyone else, Gabrielli said.
“It is important to point out that sources in the new government have been stating that the reduction of taxes would necessarily be accompanied by the reduction or elimination of various deductions and fiscal benefits, including the currently allowed deduction of some expenses in the calculation basis of the income tax for individuals, [such as] education and health, in order to compensate losses in tax revenue, and the reinstatement of the charge on dividends, currently exempted,” Gabrielli said.
Renato Lopes da Rocha, a tax lawyer with Campos Mello Advogados , said Guedes made it clear that his first efforts will be to curtail the increase in public spending. “The reduction of [the] tax burden is directly linked with the control of public expenses,” he said. “Without such control, it is unlikely that the government will have success in the reduction of [the] tax burden.”
Lopes da Rocha said Guedes has talked about unifying seven or eight taxes into one federal tax to be known as the unified federal tax. Among the candidates for consolidation are the tax on manufactured products (IPI), the tax on financial transactions (IOF), the Program of Social Integration contribution (PIS) and the Contribution for the Financing of Social Security (COFINS).
Although Bolsonaro’s Social Liberal Party is far short of holding majorities in the bicameral National Congress, Lopes da Rocha said the president has strong support from the agricultural sector and among evangelical groups. The traditional parties that were widely blamed for corruption and economic turmoil in recent years did poorly in the most recent election. “The strengthening of the mindset against socialist principles in Congress [suggests] it is feasible that Bolsonaro’s government will approve bills to reduce taxes, as well as the Brazilian social welfare system,” Lopes da Rocha said.
Gabrielli said the most significant tax reforms suggested by Guedes — such as the unification of some federal, state, and municipal taxes — require a constitutional amendment. “For this, the new government will have to garner support from at least three-fifths of the National Congress,” he said. “For the time being, it is not safe to say whether the new president will have this basis of support, since negotiations are still in progress.”
Other tax reforms require simple majorities in the Chamber of Deputies and the Senate, Gabrielli said. “Reforms like these are more likely to be approved,” he said.
Lopes da Rocha said Guedes’s pledge to refocus the role of government makes sense. “’More Brazil and less Brasília means that the government will focus on issues that affect the society such as public security, infrastructure, public health, and education, rather than be worried about reelections, paperwork, maintenance of benefits to public employees and politicians, lack of transparency regarding public expenses, etc.,” he said. “Especially in relation to taxes, the reduction of the size of the Brazilian state by cutting off commissioned posts, approving several privatizations, and reforming the Brazilian social welfare [system] will allow Bolsonaro’s government to decrease the tax burden.”