South-Western College Publishing - Economics  
A Taxing Problem for Brazil
Subject Fiscal Policy
Topic International Finance
Key Words Value-Added Tax, Economic Growth
News Story

Brazil is a country with a taxing problem. About half of the retail price of most products is made up of taxes. There are about 55 separate taxes on output, and as a percent of national output Brazil collects more taxes than either the U.S. or Japan. There are also great inequities in Brazil's system, as wealthy families evade taxes by taking advantage of giant tax loopholes. One would think in this environment proposals for tax reform would be very popular, but President Fernando Henrique Cardoso will likely have a difficult time selling Brazil's Congress on tax reform. Tax and other structural reforms are needed to stimulate the economy and attract foreign investment.

Brazil wants to close the tax loopholes of which wealthy tax evaders take advantage. It also wants to establish a more equitable and uniform value-added tax imposed upon consumers. Under the current system, there are many inefficiencies that have resulted from placating special interest groups. For example, because of a petition by local millers, taxes are imposed on the interstate shipment of flour. As a result, flour prices in the drought-stricken Northeast are 20 percent higher than prices in Brazil's wealthiest state - Sao Paulo. A more uniform tax imposed upon consumers rather than producers would, in theory, encourage exports and promote growth.

There is wide-spread opposition to these proposals. Special interest groups oppose them because they would lose their special privileges. Most of the states, including the Sao Paulo state government oppose this; firms in their district are exporters and since consumption rather than production would be taxed, the state would lose revenues. Many states object to the proposal because there is no provision for revenue sharing because the central government wants control over the tax revenues. Brazil does not seem to be close to implementing any tax reform.

(Updated November 1, 1999)

1. One of the points made in this article is that Brazil's current system of taxation has many inefficiencies and inequities.
  a. Using an aggregate demand/aggregate supply diagram, show the impact of excessive taxation on equilibrium output and the price level.
  b. Now assume that taxes are implemented that discourage employers from hiring additional workers. What will happen to your diagram?
  c. Now assume that there are significant loopholes that allow rich people to evade taxes. How would this effect your analysis?
2. Why would foreign investors be wary of investing in a country that has an inefficient tax system?
Source Peter Frisch, "Brazil's President Mounts Drive For Tax Reform," The Wall Street Journal, September 17, 1999.

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