The Tax Reform Deception

It seems that a segment of the economic elite is seeking a new pretext to divert attention from the urgent tasks that Brazil needs to overcome to escape this cycle of stagnation and regression. Lula has repeatedly stated that the country urgently needs to implement necessary economic changes, always aiming to improve the lives of the vast majority of the population in the short term. To achieve this, it is necessary to create the conditions for a sustainable recovery of economic activity in general, with job creation and increased income. For this to happen, a reduction in interest rates is fundamental. This means a decrease in the general interest rate, the SELIC – the same rate that the Monetary Policy Committee (COPOM) insisted on maintaining at the stratospheric level of 13,75% in its last two meetings. The board opted for explicit sabotage because they were aware that a President of the Republic had been elected and taken office with a program radically different from that of the government that had appointed them as members of the Central Bank's board of directors. Furthermore, it is essential that the government guide the major public banks to reduce their "spreads" on credit and loan operations, thus offering resources under more acceptable conditions than the abusive rates charged by private banks. Therefore, Banco do Brasil (BB), Caixa Econômica Federal (CEF), Banco do Nordeste (BNB), Banco da Amazônia (BASA), and Banco Nacional de Desenvolvimento Econômico e Social (BNDES) should return to fulfilling their social functions and not act in pursuit of billions in profits, as their private competitors do.

Repeal the spending cap and reduce the interest rate.

On the other hand, there is no possibility of moving towards a new model of national development without a recovery of the State's leading role. This implies rebuilding everything that has been destroyed since the coup against Dilma Rousseff in 2016, when the tragic sequence of the Temer and Bolsonaro governments carried forward the destruction of the State and the dismantling of public policies. To this end, it is fundamental to promote the repeal of the spending cap and abandon other measures of misguided fiscal austerity. The public sector needs to regain the ability to make the necessary expenditures so that Brazil can find its way back to growth. Whether through investment or the recovery of minimum levels of social policies, the State needs to spend again. No, don't imagine that I consider the issue of tax reform a sham. On the contrary. For a long time, progressive economists have denounced the regressive, unjust, and income and wealth-concentrating nature of our tax system. Among the proposals presented to change this regressive order is... "A Fair, Solidarity-Based, and Sustainable Tax Reform", which was endorsed by parties concerned with using this mechanism to stimulate productive economic activity and promote the reduction of the profound inequalities that are still a sad mark of our society.

However, this type of debate about changing our tax system encounters enormous resistance from the ruling classes and faces considerable difficulties in advancing its progress through the National Congress. Changes involving alterations to the chapter on the tax system in the Federal Constitution, for example, require a system of two votes with a 3/5 majority in each house of parliament. On the other hand, the so-called principle of "annuality" dictates that changes in this matter can only be applied in the following fiscal year. Thus, the impact of this type of change would take a considerable amount of time for its effects to be effectively felt in real life and in public finances themselves.

It is certainly true that less audacious measures, such as tax simplification and the replacement of the state ICMS (State VAT) with a value-added tax (VAT), are necessary and welcome. However, the immediate resumption of economic growth does not depend on this. Creating societal expectations that things will only "start working" after the National Congress approves the reform of our tax system only creates a smokescreen over the most immediate needs in the economic field. Certainly, changes in the tax system help. However, they do not currently possess the magical power to open all doors for the economy to grow again. Let's face it, it's not only because of some distortions in the tax system that private capital has stopped investing in the real economy through new productive and job-creating ventures.

Tax reform as a smokescreen.

That is why the strategy of sectors that do not want anything to change in terms of decentralization and equity points to the need for Tax Reform as a prerequisite for any process of resuming growth. The Minister of Planning, Simone Tebet, has already realized that this could be a good lifeline for those who do not wish to budge an inch from the rigidity of fiscal austerity and the monetary squeeze of extremely high interest rates. For her, tax reform would be the "economic vaccine" and the "only silver bullet" for resuming growth. Now, Lula's subordinate has been presenting, since the beginning of the government that has barely started, what she calls "disagreements with President Lula" and with the other members of the economic team. She spoke about this explicitly, mind you, in her inauguration speech still in January. And he continues to express himself on the subject every day, as in this Meeting with business leaders at the Brazil-United States Chamber of Commerce, held in mid-February..

It's difficult to imagine her defending any position favorable to a tax system that finally targets high incomes, easy gains from finance, profits and dividends, or the exorbitant earnings of agribusiness. The facile and deceptive discourse of the elites against the supposed "high tax burden" fails to mention the fact that the true taxpayers in our country are the poorest sectors, who pay taxes on consumption or withholding tax on payroll. Those at the top of the inequality pyramid complain with full bellies and engage in demagoguery at the expense of others, as they are the biggest beneficiaries of exemptions and the practice of blatant or scientifically programmed tax evasion, under the pompous name of "tax planning."

Thus, the real deception at the moment is to divert attention from the most urgent and immediate tasks in the area of ​​the economy. Instead of wasting energy on this diversionary tactic of a distant and difficult-to-approve tax reform with the current composition of the National Congress, the government and progressive forces should concentrate their efforts on promoting the reduction of interest rates, advancing the recovery of the purchasing power of the minimum wage, and obtaining some leeway in fiscal austerity so that the emerging tasks of the public sector can be carried out. This is the best way to accelerate growth, generate employment, and reduce inequalities.