Tax reform and its fundamentals
Tax reform was postponed while the economy was growing and the government's popularity was at record levels. Today, the cycle has reversed.
The Workers' Party government is paying a high price for its complacency during the period of economic prosperity. When the economy was growing at an average of 4,5% per year between 2004 and 2010, it would have been the right time to reform the country's chaotic tax system. The Brazilian tax structure is a huge obstacle to efficient production.
Tax reform was postponed when the economy was growing and the government's popularity was at record levels. Today the cycle has reversed. GDP is lagging and inflation has returned. As a result, the government's popularity continues to fall.
Tax reform is something society desires. In just over a year, Brazil will have elections, and the topic is likely to resurface.
Unfortunately, the issue keeps coming back and never gets any action. But it's possible that the recent protests in Brazil will serve as a warning to politicians. Taxpayers should seize this moment to include this demand on the agenda of future governments.
The issue that needs to be emphasized regarding tax reform concerns its fundamentals. Most of the projects debated in Congress in recent years have failed in this respect. The challenge is to move forward with a proposal that can effectively address the country's needs.
Usually, when discussing tax reform, fundamentals such as the efficiency of collection mechanisms, fairness, costs, incidence, and the fight against tax evasion are relegated to the background. These points should be prioritized in building a fair tax structure that stimulates production.
Brazilian tax reform implies a thorough discussion of the aforementioned aspects. However, this must be done within a context where economic policymakers are not restricted by existing fiscal institutions. Innovation is necessary.
Brazil has the most complex tax structure in the world. There are countless forms of taxation. There are about twelve taxes and dozens of fees and contributions. Every year the World Economic Forum shows that this complex system makes the Brazilian system the most inefficient in the world.
Since 1990 I have proposed a Single Tax as an alternative for the country. The proposal marked a dividing line between orthodox thinking, based on maintaining the current system of declarative taxes, and an innovative current that proposes a simple, automatic, comprehensive and low-cost structure, embodied in the taxation of financial transactions carried out through the banking system.
For twenty years I have been studying the Single Tax on financial transactions, which has already become a project ready to be voted on in Congress, and the conclusion is that this form of taxation is the only one that meets the fundamental needs of the country. Its collection method is the most efficient when compared to other proposals, it is effective in combating tax evasion, simplifies the structure, reduces public and private costs, eases the individual tax burden on current taxpayers, and causes fewer allocative distortions than its critics claim.