Popular plebiscite, tax system and balance of power.

In September, Brazil will hold a Popular Plebiscite, an initiative organized by social movements, unions, religious entities, and various civil society organizations. It is not an official government plebiscite, but rather an independent public consultation aimed at mobilizing the population around fundamental issues for the country. The process will begin on July 1st, the week of greatest mobilization will be between September 1st and 7th, 2025 (National Week), and the official voting period for the Plebiscite will take place between September 14th and 21st, 2025. The public consultation will be conducted through two questions:

1. Are you in favor of reducing working hours without reducing pay and ending the 6x1 work schedule?

2. Are you in favor of a fair tax reform, in which the rich pay more taxes and the poor pay less?

Unlike an official plebiscite, which can only be called by the National Congress and has the force of law, a popular plebiscite is a public consultation aimed at gathering public opinion and putting pressure on the government and authorities in general. Its result does not automatically become law.

The exemption from income tax for those earning up to R$ 5.000,00 and the taxation of large fortunes and high incomes, especially for those earning over R$ 50 per month, are at the center of the public consultation. Regarding this issue, aiming to reduce tax injustice in Brazil, the government sent Bill 1.087/2025 to the National Congress in March of this year, which has the following main points:

1.Expansion of the income tax exemption bracket for individuals (IRPF)Full exemption for those earning up to R$ 5.000,00 per month (R$ 60.000,00 annually), starting January 1, 2026. Currently, the income tax exemption threshold for individuals (IRPF) in Brazil is R$ 2.428,80 or R$ 3.036,00 when the taxpayer opts for the simplified deduction. Furthermore, the bill provides for partial exemption (with progressive reduction) for incomes between R$ 5.000,01 and R$ 7.000,00 per month;

2.Minimum taxation for high incomes (IRPFM - Minimum Personal Income Tax)Taxpayers who earn more than R$ 600.000,00/year will have a minimum progressive tax rate, from 0% to 10%, considering all income (including various exempt/taxed at a zero rate);

3.Taxation of dividendsProfits and dividends paid to individuals residing in Brazil will be taxed at 10% at source for amounts exceeding R$ 50.000,00/month. The proposal aims to tax higher capital incomes, which are currently exempt, to finance the tax reduction on labor income. The main rule is that, upon exceeding the R$ 50 ceiling from a single source, the 10% tax will be levied on the entire amount received. The objective of this measure is also to increase the progressivity of the tax system and compensate for the expansion of the exemption bracket for Individual Income Tax (IRPF). Total dividends received from each company up to R$ 50.000,00 per month will be exempt. For non-residents, there will be a fixed rate of 10% on the entire amount remitted to individuals or legal entities, without an exemption bracket.

Currently in Brazil, profits and dividends distributed by companies to individuals residing in the country are exempt from income tax. Since January 1, 1996, during the Fernando Henrique Cardoso administration, dividends have been exempt from income tax, based on rather weak arguments in tax terms. It is worth noting that the non-taxation of profits and dividends is typical of underdeveloped countries or those that are "tax havens" (countries that offer extremely advantageous tax regimes, or even tax exemption, for foreign individuals and legal entities). Examples of countries that do not tax dividends: Estonia, Latvia, Malta, Singapore, Hong Kong, Brunei, and Qatar. In the Americas, only Brazil and the Caribbean tax havens (Bahamas, Belize) exempt dividends from income tax. Among 35 European countries analyzed, the maximum average tax rate on dividends is 20,4%. This average reflects the diversity of tax approaches across the continent, ranging from zero rates to percentages above 50%. In the US, rates are 15% and 20% for residents and 30% for non-residents.

The objective of Bill 1.087/2025 is to make income taxation in Brazil more equitable and progressive, albeit in a moderate way. As is well known, the Brazilian tax structure is extremely regressive, meaning that the poor pay proportionally much more in taxes than the rich. This occurs, basically, because a large part of tax revenue – 43%, to be more specific – is indirect, that is, it is embedded in the price of the good or service. By applying the tax at the same rate to everyone, this type of tax penalizes the poorest. For example, a cooking gas cylinder, which costs on average R$ 105,00 in the country, contains about R$ 17,50 in taxes (mainly state ICMS). For someone earning R$ 15.000,00, this tax doesn't make much difference, but for a retiree living on a minimum wage, that amount weighs heavily per month. Brazilian workers pay indirect taxes without even knowing they are paying them.

The proposed law changes tax policy precisely by using the most progressive tax modality of all, which is income tax. Tax progressivity is the principle that the tax rate (the percentage of tax) should increase as the tax base (income, in the case of personal income tax) also increases. In other words, those who earn more pay a higher percentage of their income in taxes. The proposal, admittedly, is modest and will not signify any major change. In fact, the bill proposes the redistribution, to lower-income taxpayers, of an amount equivalent to approximately 0,25 percentage points of GDP, obtained through taxation of taxpayers with annual incomes exceeding R$ 600,000. The exemption threshold of R$ 5.000,00 is meager. A basic food basket for an adult in Florianópolis costs R$ 858,93, according to Dieese. The minimum wage required, calculated by the Department, for a family of four, is R$ 7.528,56. Brazil, in economic and technical terms, would be able to work with a much higher exemption threshold.

According to recent data from the Brazilian Federal Revenue Service, the number of people in Brazil with an annual income exceeding R$ 600.000,00 is approximately 760. This number represents about 2% of the total number of taxpayers who file income tax returns in the country (38 million). Within this group, the federal government estimates that approximately 141,4 taxpayers (approximately 0,37% of the total number of taxpayers or 0,06% of the population) would be affected by the minimum taxation foreseen in Bill 1.087/2025, as they currently pay a very low effective income tax rate due to mechanisms such as deductions for health and education expenses.

The bill would improve the income distribution profile in Brazil, where concentration is one of the major national problems. It would directly benefit approximately 14 million taxpayers (total exemption for approximately 10 million people and partial exemption for approximately 4 million people). Expanding the exemption bracket could reduce revenue by approximately R$ 25,8 billion/year, which should be offset by the new taxation of high incomes and dividends. With a measure like this, without major disruptions, the bill would improve the lives of a segment of the population equivalent to almost 30% of Argentina's population.

As expected, like all major achievements in Brazil, improving the tax situation will only happen with mobilization from those concerned. Without popular pressure, the project will not be approved in the National Congress, due to the very composition of Congress. The "tax issue," as with all major national problems, is not merely a technical problem: it is a matter of the balance of power. Furthermore, an additional difficulty in approving the project is the political-electoral issue. Improving the lives of 14 million taxpayers means improving the lives of perhaps 30 million people, including the dependents of these taxpayers (at a minimum). And the opposition in Congress, which inflicted a historic defeat on the government on June 25th by annulling federal government decrees that increased the Tax on Financial Operations (IOF), naturally does not want this, especially during an election period.

By not paying taxes, or paying less, workers can consume more, stimulating essential segments of the economy. A study by the Chamber of Deputies estimates that, with the approval of the bill, there would be an increase of R$ 10,3 billion in domestic consumption, especially in the commerce and services sectors. The main expected macroeconomic effect from the implementation of the measure is an increase in aggregate consumption, since workers who earn less have a greater propensity to consume than high-income taxpayers, who will lose a small portion of their disposable income with the project's measures. The calculation is that the tax revenue loss resulting from the exemption for lower incomes (estimated at R$ 26,2 billion) will be offset by the additional revenue from the taxation of high incomes (R$ 32,6 billion). In the short term, an increase in Gross Domestic Product (GDP) of approximately R$ 10,3 billion is estimated, which, admittedly, is little for a GDP estimated at R$ 12 trillion for 2025.

It is surprising that the public debt system is not included in the topics of this Popular Plebiscite, as this issue is at the heart of Brazil's problems. The public debt system in Brazil cost approximately R$ 928,4 billion in the last 12 months alone, up to April. This impressive amount is equivalent to 7,71% of the country's entire Gross Domestic Product (GDP) during that period. This interest expense is the main component of the so-called nominal public sector deficit, which in the same period reached R$ 939,8 billion (or 7,91% of GDP). In other words, the fiscal problem in Brazil is actually the spending on servicing the public debt.

According to a study by the Federal Chamber, Bill 1087/2025 would redistribute income to lower-income taxpayers equivalent to approximately 0,25 percentage points of GDP (R$ 32,06 billion), obtained through taxation of taxpayers with annual incomes exceeding R$ 600, as we have seen. However, the R$ 938,9 billion spent on public debt in the last 12 months represents 28,8 times the income redistribution that will occur if the exemption bill is approved. For every 1 percentage point increase in the Selic rate, maintained for 12 months, the cost of interest on Brazilian public debt increases by an estimated R$ 38 billion to R$ 40 billion. The 0,25% increase in the Selic rate alone, decided at the last Copom meeting, will mean approximately R$ 10 billion for Brazil over 12 months, practically the same increase in domestic income that we will have in Brazil with the approval of the bill.