After all, could a Wealth Tax help the Brazilian fiscal situation?

Edson Isfer

Henrique Roth Isfer

As the elections for president in Brazil draw near, the discussion about the creation of a tax on large fortunes is returning among the candidates and even in the civil society.

There are currently four proposals being discussed in Congress and all of them have two main justifications: relief of public accounts and the development of a more progressive and fairer tax system. In common, the disposal that it only can reach individuals, the establishment of a minimum net worth (around R$ 23 million) and rates between 0.5% and 1%.

The idea of taxing wealth has been shared for years by Thomas Piketty, the French economist who became world famous for his work “Capital in the 21st Century”. The author focuses on the observation that the rate of return on capital is currently higher than the rate of economic growth, which would play an important role in maintaining global inequality. Thus, the solution would be the implementation of a progressive tax on income combined with a progressive tax on assets.

Given the issues outlined above, the collection of taxes on large fortunes in Brazil could help reduce inequality rooted in society, make capital more productive – properties with high costs and no income would be discarded – and improve the perception of fairness and justice in the tax system – a fact that influences the tax compliance of taxpayers.

But why hasn’t such a tax been introduced yet? With so many positive points, shouldn’t this be the main agenda in social policy and the field of Financial and Tax Law?

Although the answer usually consists of the political influence that certain sectors exert to avoid taxation – which is not ignored – unsuccessful international experiences certainly point to another major problem: the effective collection does not justify its existence. Just as an example, between 1985 and 2016, only four of the 12 countries that had wealth taxes kept them.

There are some possible reasons for this. First of all, those who own assets taxable are precisely the part of the population that has the means to mobilize this capital. Studies estimate that about 8% of all financial wealth is allocated in countries with insignificant taxation, a percentage that rises to 22% if Latin America is considered[1].

Reinforcing the above data, The Economist, in a special article published in November 2017[2], revealed that the market for the purchase of citizenships annually moves around two billion dollars in obtaining citizenships and passports from countries with low taxation or that allow their residents to circulate in a wide range of nations.

The difficulty of monitoring and measuring assets also remains a challenge. In addition to the ease of transferring bank balances and the introduction of new digital technologies, such as crypto, the tax authorities would have to face old national problems, such as accounting for cattle and identifying and valuing assets such as high-end jewellery.

Despite being surmountable obstacles, the increase in implementation costs puts in check the effective benefit of taxes on wealth, considering the potential revenue. In 2016, in the four countries that still maintained some sort of this tax, namely, Switzerland, Spain, France and Norway, the comparative rate for full tax gains consisted of 3.70%, 0.54%, 0.48% and 1.13%, respectively[3].

If the country manages to repeat the Swiss levels, we would have, in terms of efficiency (% of GDP), collection values equivalent to the contribution to PIS/Pasep (0.97% of GDP); while if we stay close to Spain and France, the amount would be lower than the numbers of contributions to the S System (0.29% of GDP). Despite certainly being a progressive tax that would increase the perception of social and tributary justice regarding the fiscal system, one can affirm that, alone, little would change in terms of effective redistribution of wealth or increase in tax collection – Piketty foresees that a tax on inheritances, to curb the increase in inequality, should have rates of 50% to 60%.

We understand, therefore, that a broad discussion about the fiscal effects is essential for the Government to be able to evaluate the effective benefits of its implementation, as well as its limitations.


[1] BRUMBY, James; KEEN, Michael. Game-changers and whistle-blowers: taxing wealth. IMFBlog. https://blogs.imf.org/2018/02/13/game-changers-and-whistle-blowers-taxing-wealth/.

[2] VALENCIA, Matthew. Citizens of anywhere. 1843 magazine https://www.1843magazine.com/features/citizens-of-anywhere.

[3] The role and design of net wealth taxes in the OECD. OECD Tax policy studies. 12 abr. 2018. https://www.oecd-ilibrary.org/taxation/the-role-and-design-of-net-wealth-taxes-in-the-oecd_9789264290303-en?itemId=/content/publication/9789264290303-en&_csp_=b746b256f23e109b9244f92078eb7093&itemIGO=oecd&itemContentType=book.


 

Article published in IR Global.

Related

Menu