By Alcides Wilhelm, director of Wilhelm & Niels Advogados Associados.
Brazil faces a tax dilemma that not only places it in an undesirable position on the global stage, but also raises concerns about the adverse effects that an increase in the tax burden could have on the economy. The country leads an unwanted ranking of tax complexity and is among the 20 countries with the highest tax revenue in the world, according to a study by the National Confederation of Commerce in Goods, Services and Tourism (CNC), released in November 2023.
Furthermore, with the changes proposed by the tax reform, there is fear that Brazil will become the holder of the highest Value Added Tax (VAT) in the world, overtaking Hungary, which currently leads with a rate of 27%.
Economic studies have consistently pointed to the relationship between tax burden and economic growth. Tax increases, if not accompanied by appropriate measures, could result in adverse effects on economic activity. In the Brazilian context, the discussion around tax reform gains prominence, especially in the search for simplification and transparency in the tax system, but it is crucial to consider the potential impacts on the different economic sectors
Increase in tax burden
In the research “Study on the influence of an increase in the tax burden on the reduction in economic activity”, the CNC warns of the potential negative effects of an increase in the tax burden on economic growth. The analysis reveals that the increase in the tax burden on consumption can trigger a significant drop in economic activity in different sectors. For example, a 1% increase in the consumption tax burden could result in a drop in revenue in the tourism (0.49%), commerce (0.34%) and services (0.35%) sectors, damaging economic dynamics. of these segments.
Using the concept of elasticity in this context is crucial to understanding the sensitivity of economic activity to changes in the tax burden. Elasticity shows us how one variable responds to a percentage change in another variable. In the case in question, elasticity reveals the impact of changes in the tax burden on consumption behavior and, consequently, on economic activity.
Tax reform and economic competitiveness
Tax reform is a necessary response to face the complexity of the Brazilian tax system. Simplification and transparency are laudable objectives, but it is essential that such changes do not result in an overall increase in the tax burden. The reform proposal must be carefully calibrated to avoid negative impacts on the economic growth and competitiveness of certain regions.
A significant point of concern is the increase in the tax burden for the services, commerce and tourism sectors. CNC’s analysis highlights the potential consequences of this increase, including drops in revenue and economic activity in these sectors. This scenario raises concerns about the capacity of these segments to contribute to economic growth and job creation.
Furthermore, prospective studies, such as those carried out by the University of São Paulo (USP) and the Institute for Applied Economic Research (Ipea), indicate that tax reform may have asymmetric impacts on different regions of the country. States in the North region, for example, may lose competitiveness in attracting investments, which may result in an unequal distribution of economic growth among the different Brazilian regions.
Equity
The complexity of the Brazilian tax system is an obstacle to the country’s economic efficiency and competitiveness. With a multitude of taxes, fees and contributions, companies face a significant administrative burden in meeting their tax obligations. This complexity also creates an environment conducive to tax evasion and informality, harming State revenue and undermining investor confidence.
Furthermore, the high tax burden imposes a considerable burden on taxpayers, reducing the consumption and investment capacity of families and companies. This can discourage entrepreneurship, innovation and economic growth, harming the country’s sustainable development.
Tax reform demands a balanced and careful approach. While simplification and transparency are important objectives, it is essential to ensure that the proposed changes do not result in an overall increase in the tax burden, especially for sensitive sectors such as services, commerce and tourism. Furthermore, it is crucial to consider the regional impacts of the reform, seeking to mitigate inequalities and promote more equitable economic growth across the country. Careful analysis of these challenges is essential to ensure that tax reform effectively contributes to Brazil’s sustainable economic development.
