October 8, 2021

Latam

BRAZIL: Tax reform surfaces amid legislative profligacy

BY Mario Marconini

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( 3 mins)

President Jair Bolsonaro has been uncommonly discreet since his official apology to other branches of government for his frequent attacks against them two days after the pro-government protests on Independence Day, 7 September. Congress was already distancing itself from the government when the president was incendiary but has found yet more space to lead its own agenda with him silent. Despite worsening conditions in the economy, most of the items being currently considered tend to be fiscally irresponsible, inspired by political or electoral priorities.

House Speaker Arthur Lira has been especially active and much less concerned with budgetary implications than with the number of initiatives he spearheads. He seems moved to establish a quick legacy of achievements, no matter their content, for his own political reasons. A so-called mini-reform on income tax that cleared the House and has already been with the Senate for a couple of weeks is likely to get swift treatment when it comes back to the House despite opposition from big business, market analysts, and the government. Lira, an ally of the government, secured its approval by mustering support from the opposition.

In the Senate, the mini-reform on income tax faces some resistance but should advance. Once it does, a Senate-approved bill that would concede a 90% pardon for fines and interest payments of tax debts vis-a-vis the government – the so-called “Refis” program – should also move in the House (a trade-off between Lira and Senate Chairman Rodrigo Pacheco). Refis, once again, goes against government preferences since it makes fiscal matters worse for 2022 and beyond.

Payroll deductions for seventeen economic sectors that the government would like to see expire this year have also been extended by an additional five years by the House – and should ultimately clear the Senate as well. Finally, the House also just passed a 1% increase in a federal fund devoted to municipalities – a bluntly electoral move to secure local support for politicians seeking re-election in October 2022.

The profligacy of Congress has been striking lately. However, there is still no guarantee that legislators will oblige and accept allowing the government to leave the payment of court-mandated judicial claims due next year outside the official spending ceiling. Spending above the ceiling is a federal offense and led to the impeachment of former president Dilma Rousseff (2011-2016). The Bolsonaro government is pressing Congress to pass this type of fiscal free lunch mostly because without it, it will not be able to pay for a new cash transfer program, the Auxilio Brasil – once again, a top electoral priority, this time for the president himself.

It should be noted that this renewed congressional activism has also unearthed the prospect of a broad-based, consumption-related tax reform being approved this year. The rapporteur of constitutional amendment 110 in the Senate presented a fairly balanced report on the unification of nine taxes into one VAT this week. The approval of PEC 110 remains a very tall order. However, one should not underestimate the pressure being exerted on the political system by influential economic agents who are truly concerned with the state of the economy and demand a return, albeit partial, to a serious reform agenda.

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