FUNDAÇAO GETúLIO VARGAS
Comissão de Reforma do Ministério da Fazenda
LISIA DE PUBLICAÇÕES
Maio/ 1964 - Publicação N .O 1 - Relatório Preliminar
Novembro/ 1964 - Publicação N.O 2 - O Processo Tributário
Abril / 1965
Junbo/ 1965 Junho/ 1965
- Publicação N .O 3 - Anteprojeto de Código
do Impôs to de Renda
Publicação N.O 4 - O Sistema Tributário brasileiro
F U NDAÇÃO GETÚLIO VARGAS
COMISSÃO DE REFORMA DO MINISTÉRIO DA FAZE NDA
O '.
/-l. rLUIZ SIMOE~ LO PE S
THE T AX SYSTEM
OF BRAZIL
A REPORT TO THE GETÚLIO VARGAS FOUNDATION
B Y
COMISSÃO DE REFORMA DO MINISTÉRIO DA FAZENDA
Presidente
Luiz Simões Lopes
Preftidente Substituto
Alim Pedro
Coordenador-Geral
Gerson Augusto da Silva
QUADRO DIRIGENTE
Presidente da Fundação Getúlio Vargas
Diretor -Ex~'CUtivo da Fundação Getúlio Vargas
Técnico de Economia e Finanças - MF. Representante do
Ministé-rio da Fazenda
Coordenador do Setor de Acompanhamento
Ottolmy Strauch T écnico de Admin~ ~tnção - DASP
Coordenador do Setor de Automação
Elson dos Santos Mattos - T écnico de Mecanização - IBGE
Coordenador do Setor de
Benedicto Silva
Documentação e Assistência Técnica Intern8!CÍonal
A ssesse,. para Assunto! Legislativos - DASP. P rcfessor da Escola Brasileira d e Admini stração Pública -FGV
Coordenador do Setor de Imtalações e Equipamentos
Syndoro Carneiro de Souza Engenheiro - DASP
Coordenador do Seltor de Legislação
Arthur R ibeiro da Silva Filho - Oficial de Administração - MF
Coordenador do Setor de Organização e M é todos
Newton Corrêa Ramalho Técnico de Administração - MJNl
Coordenador do Setor de Pessoal
Paulo Poppe de Figueiredo - Assistente Jurídico - DASP
Coordenador da Equipe de Reforma do ImpÔsto Aduaneiro
O swaldo da Costa e Silva Agente Fiscal do Impôsto Adua-neiro - MF
Coordenador da Equipe de Reforma do Impósto d e Con sumo
Werner Grau - Agente Fiscal do Impôsto de
Con-sumo
Coordenador da Equipe de R eforma do ImpÔsto de Renda
Guilherme dos Santos Deveza - Agente Fiscal do Impâsto de Ren-d a - MP
Coordenador da Equipe de Pe ~q uisas E conômicas
Francisco Sá Júnior - Economista
Coordenador do Escritório Regional em São Paulo
Astério Dardeau Vieira Técnico de Administração - DASP
Secretária-Executiva
Maria Joana de Almeida Fernandes AgentE' Fiscal do Impâsto de Renda
- MF
Qu ADRO TÉCNICO
SETOR DE ACOMPANHAMENTO
Assessor
Júlio de Almeida França - Oficial de Administração - MF
SETOR DE AUTOMAÇÃO
Encarregados
Edmundo Massadar Erton PimEnta Bastos Heitor da Câmara Vellozo Oswaldo Ney Soares Carneiro
Assessôres
Roberto Pereira da Silva Valdecir Freire L opes
ASJSistentes
Gilzele Lygia Tenório dE' Melo Jayme Bueno Brandão Lione Spivak
Norton Tavares da Cunha Melo
Programadores
Antonio Sérgio de Freitas Leite Cláudio Portela Peixoto
Duílio Cam E'fOn Eliane Bretas Estêves Luís Ernani de Morais Costa
Programador Auxiliar
Luiz Carlos B orges Delgado
Desenhista
E verton Pimenta Bastos
Estatístico
Francisco Alves de Sá
Auxiliar
Cláudio Dantas Pinto Pessoa
Estatístico - IBGE
Escrevente-Datilógrafo - MF Estatístico - IBGE
Técnico de Seguros - IRE
Engenheiro Engenheiro
DASP DASP
- Programador - SNR
- E screvente-Datilógrafo - MF
SETOR DE DOCUMENTAÇÃO E ASSISttNCIA TÉCNICA INTERNACIONAL
Che f e d o Subsetor d e Documentação
Ana M aria· B ernardes Goffi Marquesini - Auxiliar de P esquisa - FGV
A $;st entes
Ruy Vianna
T erezinha d e Jesus Santos
Ch efe do Subse tor d e Assistê ncia
A rthur Soares X avier Ferre ira
A !'Sistentes
ArIette MuIler G ise lle Muller Neusa Timponi
Yedda Berlink do R égo Macedo
S ecret ária
Priscila Scott Bueno
- Redator da Rádio Nacional - Oficia l d e Ad m inistração - MJNI
T écnica Internacional
- F iel do Tesouro - MF
F iel do Tesouro - MF Fiel do Tesouro - MF
Agente Fiscal do Impâsto de
Ren-da - MF
Fiel do Tesouro - MF
SETOR DE INSTALAÇÕES E EQUIPAMENTOS
A ssisten1e
Antônio Jo~é Arêas RibEi ro - D esenhista - ETUB
SETOR DE LEGISLAÇÃO
C onsultor E special
Pedrylvio Francisco Guimarães Ferreira - P rocurad or da Fazenda Naciona l - M F
Chefe de E quipe
Luiza VilIela de Andrade d a Silva
A uistentes
Anna Luiza da Silva Ba rbcsa Cláudio Mata de Almeida
Mi lton Acácia de Araújo
Auxiliares
Meria T a tiana da Gama B arandier S éq;;io Cardoso da Costa
- Oficial de Administr ação - MF
Oficial de Administração - MF Aluno da E scol a Brasileira de
Ad-ministração P ública - FGV Oficial de Administração - MEC
Escrevente-Datilógrafoa - MF E .c revent ó·-Datilógra fo - MF
SETOR DE ORGANIZAÇÃO E MÉTODOS
Consultor Especial
Alvaro Brandão
Assessôres
Célia Neves Lazzarotto
Daisy Florie Passarinho Pereira
Hélio Ma galhães Escobar Luiz Carlos de Danin Lobo
Che fe de Equipe
Maria Lúcia Baena Machado Silva
ílssistenfeJ
Dalba Va!concelos
Edson Ferreira dos Santos Francisco Queiroz de Carvalho Gilberto MontEiro da Silva José Giovani Pacífico de Oliveira Liliana Weinberger
Rosa Caroli
E stagiário
G e rson AIVE'S Cabral
Técnico de Administr~çã.o - DASP Técnico de Adinin'stração - DASP Professôra da Fundação Getúlio Vargas
Técnico de Administração - DASP Professor da Fundação Getúlio Vargas
Agente Fiscal d o Impôsto de Ren-da - MF
Oficial de Administração - MF
Exator Federal - MF
- Agente Fiscal do Impôsto de
Rem-da - MF
EQUIPE DE REFORMA DO IMPôSTO ADUANEIRO
Cot1...<'Ultor Especial
Arrnindo Corrêa da Costa
Asse$S"óre~
Augusto César Cardoso
D ébora S amp aio Eduardo Abrahão
João Fernandes de Almeida Luiz Em)'gdio Pinheiro da Câmara Maria C!eônia Macedo de Castro Freire
-M oacir de -M atos Peixoto Néa Lopal Monteiro Sacco
Age'llte Fiscal do Impôsto Aduanei-ro - MF
Funcionário da CACEX - Banco do Brasil
E scriturária - MME Estatístico MF Estatístico - MF
P rofessôra da Fundação Getúlio Vargas
Agente Fiscal do Impôsto Adua-neiro - MF
EQUIPE DE REFORMA DO IMPÓSTO DE RENDA
A.$'6'&ssóre~ Ettpeeiais
Léo Leite Costa
Noé Winkler
vm
A gente Fiscal do Impôsto Adua-neiro - MF
Agente Fiscal do Impôsto de Ren-da - MF
Asses ~ô ras
Es.tela Leijó Cardoso
Germânia Bastos
Helena da Costa Rodrigues
Hele::a Rocha de TejOõTa la
Agente Fiscal do Impôsto de Ren-da - MF
Agente Fiscal do Impôsto de Ren-da - MF
Agente Fiscal do Impôsto de Ren-da - MF
Agente Fiscal do Impôsto de Rendoa - M F
EQUIPE DE PESQUISAS ECONÔMICAS
Asses.!ôres
Gilberto Câmara Moog
Jorge Alberto Freitaos Ribeiro
Assistente
Armando Barros de Castro
Proc urador dE' 308 Categoria -PDF
Oficial dOe Admini stração - Pre-feitura de Pôrto Alegre
SETOR DE PESSOAL
A!\Ilessôra Especial
El oah Meirelles Gonçalv es Barreto Diretora da Divisão de Seleção e Aperfeiçoamento do DASP
ESCRITÓRIO REGIONAL EM SÃO PAULO
Consultor Especial
Henrique Silveira d e Almeida
Chefes de Equipe
Antônio Arr.ílcar de Oliveira Lima
Geraldo Pinheiro Machado
Engenheiro Especialista em Mecaniz~o
Sal vador Perroti
En~enheiro Auxiliar
Fukuhera Takatika
Técnicos de Organização
Ernesto Lui gi C ermine de Ambrosis Flávio Reis Cintra
Hélcio Ferreira Borba Luiz L orenzo Rivera Marly FETrcira Pinto
Técnicc -Auxiliar de Organizaç.iio
F ernando Castro Aguiar
A ssistente da Escola Politécnica de São Paulo
T écnico de Administração - Go-vêrno do Estad o de São Paulo
Assistente de Orl1anização
Cás-sio de Momis
Técnicos de Pessoal
Antônio Carlos Bernardo Evelyn Naked Castro Sá Maria Lúcia Lorenzo Rivera Nair SaBes d a Silva Sônia Celli
A sslÍStente
Gaspar Debelian
QUADRO A D :VII ~IS TRATIVO
SETOR DE ADMINISTRAÇ.\O GERAL NA FUNDAÇÃO GETúLIO VARGAS
Chefe da Divisão de Contabilidade
Luiz Sidney Vidal do Couto
Chefe da Seção de Material
Albertino Fe-rro da Silva
SECRETARIA-EXECUTIVA
Chefes de Equipe Walde mar Chamarelli
Maria de Lourdes R od rigue s Diniz
A ssistentes
Esther Silva Ramos GinettE' Pereira da Cunha Maria Orfila Melo Sabino P e reira da Sil va
Tsquígrafas
Trene Pereira de Sousa Yvonne de MCdaes
D atilógrafos
Anita Sant' Ana
Atir Valente Bittencourt Carme n Goml3
Celeste Serrano do Amaral Dalva Lima Costa Ed'na Rodrigues Paixão Erimi ta B ene\'ides Kolesza Jader Alcântara Vieira Joana Silva Braga Luíza Costa
Rharia Diehl Travasws Therezinha Baptista C osta Ve ra Maria OrnEoJIas Chaves
Auxiliar
P a ulo Corrêa da Costa
x
Oficial de Administração - MF Oficial de Administração - DASP
Oficial de Administração - DASP Oficial d E' Admini stração - MJNI
Escriturá ria - MF
E screvente-D a tilógrafo - MF
Taquígrafa Taquígrafa
MF MF
Datilógrafa - MF D atilógrafa - DASP
Oficial de Administraçã o - MF
Datilógra fa - MF Datilógrafo - FGV Escriturária - DASP
SETOR DE DOCUMENTA ÇÃO E ASSISTÊNCIA TÉCNICA INTERN ACIONAL
Assistente Administrativo
Eunice Magalhães Marques
Secret ária
N eyde Couto das Neves
Auxiliares
Lúcia Maria Keller Sussekind
Maria Neusa Brasil Quartin - D atilógrafa - MJNl
ESCRITÓRIO REGIONAL DE SÃO PAULO
Secretária
Maria Celeste Martins FeTTeira Gomes
Datilógrafas
Hilda Pietrykowski
Carmem Lacerda Guaraciaba
CONSULTORES TÉCNrCOS INTERNACIONAIS
Carl s. Shoup
Fred'erick J. L awto n
Jasper S. Costa
MIssÃo ESPECIAL
Professor da C olumbi a University New Y ork
Ex-Diretor do Bureau d e Orçamen-t o dos E sOrçamen-t ados Unidos
GRUPO PERMANENTE
( Tax Admin istration Adivisory T eam do Te so uro Americano, enviado sob os a u spícios da USAID )
Diretor
G e"Orge J . Leibowitz
Subdiretor
Paul T. Maginnis
Assistentes
Edward J. Lewis
Hyman P. M oldover P atrick F . Keaney
Stanley Stein
Especialista em questões gerais de administração fi scal
E specialista em p roblemas de re-gulamentação de le·is. tributárias
Especialista em pl anejamento de sistemas de processamento
eletrô-nico d e d ados
Especialista em pro b lemas. d e in-vestigação fisca I
Especialista em probl emas de arre-cadação
FOR EWORD
The Tax System of Bra.zil, now presented to the public in the fonn of a book, is another contribution of the Reform Commission of the Ministry of Finance to the Brazilian lite-rature on the modern aspects of taxation.
In the privacy of the Commission, the present work is re-ferred to as the «Shoup Reporb. It contains a study conducted by Professor CARL SHOUP, Columbia University, New York City, for the benefit of the Commission.
One of the greatest living authorities on taxation, Pro-fessor Shoup has acted as an advisor to the governments of a number of countries . At the invitation of the Getúlio Vargas Foundation and under the auspices of USAID, he carne to Brazil in August 1964, in the same capacity of tax expert.
To pave the way for his understanding of the true nature of the Brazilian tax system, the Reform Commission of the Ministry of Finance held two round tables. On both occasions, the main speaker was Professor RUBENS GOMES DE SOUZA. The first round table dealt with the Brazilian tax system as a whole, its origin, its evolution and its present structure. The second dealt with the income tax. In addition to the presiding officer, LUIZ SIMõES LOPES, and Professor CARL SHOUP, several experts on tax policy and tax administration attended these round tables, most of them actively participating in the
debates. Among those who ahended, some as observérs, and some as members of the Commission, were the following: ALE-XANDRE KAFKA, BENEDICTO SILVA, BENJAMIN HIGGINS (American), DUARTE PACHECO DE CASTRO, FRANCISCO SÁ FILHO, GERSON AUGUSTO DA SILVA, GILBERTO C. MOOG, GILBERTO ULHôA CANTO, GUI-LHERME DEVEZA, HARRY C. REEN (American), JASPER COSTA (American), JOHN KAUFMANN (American) , MARIA DO CARMO SANTOS DIAS, NEWTON RAMALHO and OTHOLMY STRAUCH.
The formal presentation of the «Shoup Reporb took place at a meeting presided over by Ambassador ROBERTO DE OLIVEIRA CAMPOS, then Acting Minister of the Ministry of Finance. Present at the meeting were the following persons: ALEXANDRE RAFRA, BENEDICTO SILVA, BENJAMIN IDGGINS, EDUARDO LOPES RODRIGUES, FRANCISCO SÁ FILHO, GERSON AUGUSTO DA SILVA, GILBERTO C. MOOG, GILBERTO ULHÔA CANTO, GUILHERME DEVEZA, HARRY C . KEEN, JASPER COSTA, JOHN KAUFMANN, JOSÉ LUIZ BULHõES PEDREIRA, MARIA DO CAR-MO SANTOS DIAS, NEWTON RAMALHO, OTHOLMY STRAUCH, ROSENSTEIN RODAN and S E B A S T I Á O SANT'ANNA E SILVA .
Even though it was prepared in a very short time (Profes-sor Shoup had only four weeks to examine the basic legislation, interview authorities and experts in the Finance Ministry and write the text) the present report presents a fairJy comprehen-sive picture of the shortcomings, inconsistencies and anachro-nisms of the Brazilian tax system. It points out as well, under the form of specific recommendations, the institutional mea-sures that Professor Shoup prescribes to remedy the problems. As he himself confesses, some of his recommendations are in conflict with certain constitutional provisions, being conse-quently infeasible unless the Brazilian Constitution is amended.
The Shoup Report enhances the series of published stud-ies conducted by or under the auspices Df the Reform Com-mission of the Ministry of Finance.
CONTENTS
FOREWORD ... . .... . .. . .... . ... . ... .. .. . ... ... XllI INTRODUCTION
BACKGROUND AND SUMMARY
Background
1
5
7
A - The G overnment Sector's Share in the Brazilian Economy 7 B - Estimated 1965 Federal R evenue and Deficit 8 c - Estimated 1965 D eficits of Government Postal System,
Railroads, and Merchant Marine ... .. . ... . ... 10
D - Earmarked Revenues (Receita Vinc ulada) . . . 11
Earmarked Revenues . ... . . . ... . ... .... ... 12
E - Time Restriction on Vo ting New Taxes ... ... . ... 15
F - Taxes and Quasi-Taxes Excluded from t h e Present Report .. 15
Sumnw,ry ... .... . .... .. ... . ... .. .. . . . ... . .... .. . Summary of R ecommendations and Suggestions 16 17 PART 1 -THE INCOME TAX . . . ... ... 25
The Income Tax .... ... . ... . ... . ... . ... ... . . ... 27
A - The Personal Exemption ... . . . .... . ... .. ... 28
B - Exemptions for Spouse, Children, etc. . ... . .. . ... . .... .. 30
C - The Schedular Rates . ... ... ... . ... 30
D - The Progressive-Rate scale . . ... .... . . .... .. ... .. ... .. 32
E - Compulsory Loans on Individuais .. .. .. .. . . ... ... .. .... . .. 34
F - Withholding a t Source on Wages and Salarles . ... .. . ... 36
Incorne Tax for 1965 Based on the Salaries of 1964 . ... . . 38
G - Family Incorne . . .... . . .. .. .. . ... .. .. ... . . . ... ... .. . . ... 48
H - Non-business Deductions . .... . ... . .... . .. .. ... ... . ... . 49
I - Juridical-Person Inoome Tax . .. ... ... . ... . ... .. . 49
J - Sole Proprietorships and Partnerships . .. ... . ... .. 50
K - Inflation and the Taxation of Business Incorne .. .. .... . .. .. 52
L - Cap ital Gains and Losses . . . ... . ... ... .. ... .. ... 58
M - Excess Profits Tax 59 N - Transition to Pay-As-You-Go .. . .. .. .. . ... . . .. .. .. . ... 60
O - Agricultw·al Incorne ... . ... . ... .. . ... . ... . . . .. .. 60
P - Incentives to Economic Development . ... ... .. ... .. . . . .. 61
Q - Foreign-Source Incorne 62 P ART II - THE FEDERAL GOVERNMENT'S CONSUMPTION TAXES STAMP TAXES AND TAXES ON MOTOR FUELS, etc. ... . .. .. . .. . .... ... . ... . ... .. ... .. . . ... . .. . 63
The Federal Government's Consumption Taxes, Stamp Taxes and Taxes on Motor Fuels, etc . . . . ... .. . . .. . .. ... .. .. . . .. . .. .. 65
A - Consumption Taxes . . . 65
1 . The Selective 30 per cent increase . ... . . . .. . . ... . . 66
2 . Tobacco . . . . ... . .. .. . .... .. . .. . .. . . ... ... . ... '37
3 . Beverages 68 4 . Producers Goods . .. . ... .. . . ... . . ... ... . .. .. .. .. .. . . 69
5 . Services .. . .... .... .. . . 69
B - Starnp Taxes 70 C - "Single Tax" (Impôsto Único) on Motor Fuels, etc. ... ... 70
PART III - THE NATIONAL TAX SYSTEM OF BRAZIL ... .. ... .. 73
The National Tax System 01 Brazil .. ... . ... ... . . ... ... .. ... 75
A - The Network of Federal, State and Local Fiscal Relations . . . 75
E - Remarks on Particular Taxes . . . . .. .. .. . . ... . .. .. ... . . .. .. ... 79
APPENDIX : Notes . . . .... . ... . . . ... . .. ... . ... . .. . ... .. . ... . . 81
The present report, made at the request of the Getúlio Vargas Foundation, is divided into four parts.
The first part contains background material and a summary of recommendations. It is followed by three numbered parts I,
n
andm.
Part I deals with the income tax, special attention being given to the proposals in the «Anteprojeto do Código do Im-pôsto de Renda» (two volumes, July, 1964) by Dr. José Luiz Bulhões Pedreira.
Part
n
is concerned with the Federal consumption taxes, stamp taxes, and tax: on motor fuel and certain other sources of .energy, in so far as these taxes can be altered without amending the Constitution.Part UI offers some suggestions for the tax: system of Brazil viewed as a whole: federal, state, and municipal. Some of the measures considered in Part III would require amendment of the Constitution .
pa-pers of the Commission on Refonn of the Ministry of Finance of the Getúlio Vargas Foundation, (5) the «Anteprojeto» noted above, and (6) certain other docwnents and papers . This report has been written during my visit to Brazil, for this purpose, in
August and September, 1964. It is with more than usual plea-sure that I gratefully acknowledge my indebtedness to Dr. Octavio Gouvêa de Bulhões, Minister of Finance, Ambassador Roberto Campos, Minister of Planning, and Dr . Luis Simões Lopes, President of the Getúlio Vargas Foundation; to the members of the Commission on Fiscal Reform, particularly Professor Benedicto Silva, Dr. Gerson Augusto da Silva, Dr . Guilherme Deveza, Professor Newton Ramalho, Dr. Gilberto C. Moog, and Dr. J{)sé Luis Bulhões P edreira; to the members of the Round Table on Tax Reform, particularly Professor Rubens Gomes de Souza and Dr. Gilberto Ulhôa Canto; to officials and consultants of the Ministry of Finance, especially Professor Alexandre Kafka, Dr. Domingos Grello, Chief of the Cabinet of the Ministry, and Snra. Maria do Carm{) Dias; Dr. Júlio Barbieri, Director of the InternaI Revenue Department and Dr . Orlando Travancas, Diretor of the Income Tax Department; to M. Charles Taylor, of Price - Waterhouse; to officials of USAID jBrazil, particularly Mr. Harry C. Keen and Snra . Inéa Fonseca Campos; to my assis~ant on research and staff arrangements, Arthur S. Xavier Ferreira, and to the members of the secretarial staff: Arlette Muller, Carmen Sylvia Martins, Giselle Muller, Helena de Britto e Cunha, Lúcia Maria K . Sussekind, Odette Bernardini and Yedda Macedo.
To my colleagues from the United States, Mr. Jasper S. Costa and Mr . Frederick J . Lawton, who took time from their own assignments to assist me in many phases of this tax study, I express my appreciation and thanks.
BACKGROUND AND SUMMARY
The background for this report concerns the share of the government sector in the Brazilian economy (Section A), the estimated 1965 deficit (B), the estimated 1965 deficits of the Government Postal System, Railroads and Merchant Marine (C), Earmarked Revenues (D) , Time Restriction on Voting New Taxes (E), and Taxes and Quasi-Taxes Excluded from the Present Report (F) .
The summary appraises the nature of the tax problems as it appears, in Septe mber, 1964, and lists the conclusions on tax policy that are reached in the several sections of Parts I, II, and
m
below.BACKGROUND
A - The Government Sector's Share in the Braz:ilian
Economy
Budgetary expenditures of the Federal Govemment in 1963 were apparently equal to about 15 or 16 per cent of gross do-mestic product. Tax revenues were about 9 per cent, and total ordinary revenues plus revenue from compuloory loans, about 10 per cent, of gross domestic product. These data do not include social security taxes or expenditures, or the exchange profit account.
The percentages for 1962 are almost the same. 1
To what extent these expenditure figures include transfer payments, loans or grants to states and municipalities, and deficits of government enterprises is not evident from the sources at hand, but presurnably some such items are included, since the largest spending department in 1963 was the Ministry of Finance (36 per cent of the total) and the next largest, the Ministry of Transport and Public Works (24 per cent).
The percentages would be appreciably larger if states and municipalities were included. It is said that their tax revenues account for about 45 per cent Df total federal-state-municipal revenues. If this is so, total t ax revenues would be about 18
per cent of gross domestic product, and total budgetary ex-penditures, about 23 per cento Such percentages are lower, at least on the taxation si de, than those of most European countries and the U.S.A., but higher than those of many, if not most, Latin-American countries.
B - Estimated 1965 Federal Revenue and Deficit
Of the Cr$ 3,000 billion budget receipts estimated for calendar year 1965 in the Budget for 1965 (the fiscal year is the same as the calendar year) , tax revenue, compulsory loan, and fees account for Cr$ 2,938 billion, consisting of Cr$ 2,788
billion on current account and Cr$ 150 billion on capital account . 2 This latter amount consists of Cr$ 121,560,000
thousand compulsory loan and Cr$ 28,310,000 thousand excess profits taxo The compulsory loan proceeds are here lumped with tax revenues, because of the compulsory feature and because of the attitude of taxpayers toward compulsory loans.
In addition, the motor fuel tax and miscellaneous similar taxes going chief1y to the highway fund outside the budget may amount to some Cr$ 240 billion. 3 Total tax revenues
anticipated for 1965 may thus be estimated at ahout Cr$ 3,200
billion.
1 S ee Note 1, in A ppendix .
2 S ee N o e 2, Ül Appendix.
:I See Note 3, in Appendix.
The share of this that comes from income taxation may be estimated as follows . There is Cr$ 605 billion credited to current revenue account, 4 plus an unspecified part of Cr$ 250
billion «estimated increase in collection of (alI) taxes» 5 due,
apparently, to rising prices, faster collection, and higher rates, plus, finally, Cr$ 150 bHlion additional credited to capital account under «credit operations », as explained above. G li
Cr$ 150 billion of the Cr$ 250 billion is income tax, the total revenue from income taxation, including the compulsory loan, for 1965 rnuy be estimated at Cr$ 905 billion. This is 28 per cent of the estimated Cr$ 3,200 billion total tax revenue (including ccmpulsory loan) . But the states and municipalities collect tax revenue that will be perhaps from one-third to 45 per cent of total tax revenue (see Part l i below), hence income taxation will account for some 19 per cent, or 15 per cent, r espectively, of total federal, state and local tax revenue.
The Cr$ 905 billion estimate includes the 15 per cent cf income tax share that is distributed to municip:üities (see Part
m
below).Apparently almost half the income tax will be collected at the source, chiefly on individuaIs incomes, more than a third from legal entities, chiefly corporations, on their profits, and the remaining 10 to 20 per cent directly from individuaIs filing returns. 7
Ccnsumption taxes (excise taxes), exclusive of the gaso-line tax, are estirnated at Cr$ 1,487 billion for 19658 plus an
unspecified part of the Cr$ 250 billion increase in collections noted above. If Cr$ 100 billion of this is aUocated to consump-tion taxes, they can be estimated at Cr$ 1,587 billion, or about 50 per cent of the Cr$ 3,200 billion tax revenue. The figure of Cr$ 1,587 billion includes the 10 per cent share that is distributed to municipalities (see Part IH below) .
Stamp tax revenue is estirnated at Cr$ 241 billion, and customs duties and allied revenues at Cr$ 151 billion. The
4 See Note 4, in Append ix. ;, See Note 5, in Appendix. G See Note 2, in .Appe·r..dix.
7 See Nete 6, in Appendix .
H See ]I;·;,te 7, i:1 Appendix.
tax on electrical energy is estimated at Cr$ 44 billion. Fees
account for Cr$ 11 billion. o
Expenditures for 1965 are estimated at Cr$ 3,775 billion, of which (1) Cr$ 1,160 bilüen are current operating expenses (Despesas de Custeio) ; (2) Cr$ 1,534 billion are «transfer» expenditures (Despesas de transferências), including transfers to cover operating deficits of governrnent enterprises, and true transfer payments such as p ensions; and (3) Cr$ 1,081 billion are capital expenditures, including Cr$ 577 billion for capital outlays of government enterprises. The resulting deficit is estimated at Cr$ 775 billion. But the Budget is said to reflect only one-thid of thc financiaI operations of the federal sector; the ether two-thirds are undertaken by the more or less de-centralized, independent govemment enterprises (autarquia!> and emprêsas mistas. 10 The Post Office does not fali in this
categery; its entire ex!)enditures are included in the Budget.
The 3 per cent tax on payrolls of legal entities introduced by the law of July 16, 1964, Art. 2, is to be paid iuto the Fundo de Indenizações Traba!histas ; this revenue is apparently net included in the estimates above. This tax is considered in the present repert as p art of the social security system, on which no policy reccmmendations are offered. In any event the net yield of this payroll tax wiU be less than its gross yield, since the amounts of it that are invested in the indexed bonds can be deducted in computing taxable income for thc income taxo
The proceeds to come from the 5 per cent tax on revalua-tion of fixed assets (see Part I-K below) are presumably included in the total above.
C - Estimated 1965 Deficits
of
Govemment PostalSystem, Railroads, and Me1chant Marine
,~1'" " .". ':,*, ~'~;~ !!'- ;;;''?jf 1
Postal revenues are estimated in the Budget for 1965 at Cr$ 10,000,000,000, expenditures at Cr$ 157,640,010,000, of which Cr$ 17,800,000,000 are capital expenditures. The deficit,
Cr$ 147,640,010,000, is 94 per cent of the expenilitures. 11 This
postal deficit is about equal to the estimate of import duties for 1965 (Cr$ 151 billion), or nearly tWú-thirds as large as total stamp tax collections.
Government railroads are estimated in the 1965 budget to incur a deficit of Cr$ 290 billion (no details are given on revenue and expenditure). 12 This deficit is about the same
size as the estimated r evenue from the corporation income taxo
The government's Merchant Marine and port deficit is estimated (1965) at Cr$ 110 billion. 1:\ This is about equal to the individual income tax collected other than at source.
The combined deficit of those three government enter-prises is almost Cr$ 550 billion. Evidently, all income tax rates coult be cut in half (at least), if these deficits were eliminated, without increasing the budget deficit. Alternatively, consump-tion tax rates could be cut by one third.
D - Earmarked Revenues (Receita Vinculada)
.... • " ,' .--- _'1"--:,\' : A considerable amount of the Federal Government's tax revenues are earmarked for specific purp oses. These allocations are p robabIy not, however, a chief cause of the Federal Gov-ernment's pr esent financiaI difficuIty, nor do they in general seem tú be so lar ge cr so irrational as to Iead to grave misal-location of resources. This t endency to segregate particular revenues to particular uses can easiIy be a buse d, and some of the present earmarkings might be eliminated in recognition of the potential dangcrs of this practice.
A fut of the earmarked taxes, fees, and cther revenues, supplied by the Ministry of Finance in August, 1964 is re-produced below:
11 Sce Note 10. in App endix.
EARMARKED REVENUES
rMPORT DUTIES
8 % of the total of the Import duties goes to the National Port Fund
100 % of the Import duties on vehicles and parts goes to Petrobras
CLEARENCE TAX
10% goes to the Federal Electrification Fund
15% goes to Aeronautic Fund
0,5 % goes to the Land-and-cattle Fund
3,5 % to tbe Re-equipment of Custom houses
15% to the Naval Fund
18% to the Social Security Fund
32 % to the Merchant Marine
6 % to tbe Concessionary of the Ports
EXCISE TAX
10% of the total goes to the Municipalities
4 % of the total to the Federal Electricity Fund
Automobiles - 100 % to Petrobras
Additional on beverages - 50 % for medicaI care
lNCOME TAX
15% of the total goes to Municipalities
Additional tax for family welfare - 100% for family, allowance
STAMP TAX
T AX ON LOTTERY
Raff1e - 60 % to subsidies
Sweepstakes - 100% to welfare
PENITENTIARY STAMP
100 % to the rebuilding of penitentiaries
SINGLE TAX ON ELECTRIC POWER
40 % to the Federal Electrification Fund
50% to the States, Federal District and territories
10% to the Municipalities
TAXES
Union Tax - 100% to the Social Fund
Lighthouse duties - 100 % to the Naval Fund
Racetrack - 70 % to the Commission on Breeding of
Horses
24 % to the Army Cavalry
INCOME FROM PUBLIC ENTERPRISES
Northeast Bank - 100 % for itself
National Steel Co. - 100% to the University of Brasilia
National Motors Factory - 100% to BNDE (National
Bank for Economic Development)
São Francisco Hydroelectric Power - 100 % to BNDE
Manaus Hydroelectric Co. - 100% to BNDE
PETROBRAS - 100% to itself
National Cold Storage Co. - 100 % to BNDE
National Railroad Co. - 100% to BNDE
National Insurance Co. - 100% to BNDE
INDUSTRIAL INCOME FROM THE MINISTRY 0F' AGRICULTURE
100% to the Land-and-Cattle Fund
OTHER REVENUE SOURCES
Additional tax on income tax - 99% for economic de-velopment
Taxes on Art. 3 L/1628 - 100% to service Economic Development Certificates
Interest on OER - 100% to service the Economic
De-lopment Certificates
Payment of the agreement on art. 5(', law 1628 - 100% to service the Economic Development Certificates
EXTRAORDINARY REVENUE
Additional on income tax - for Economic Development
Additional on legal entities profits - Social Security Fund.
Fuel Oil tax coUected by Bank of Brazil
10% to railroads
90% to highways
40 % to Federal
48 % to States
12 % to Municipalities.
though not, as the earmarking provisions noted above do, in tax structure.
E - Time Restriction on Voting N ew Taxes
Efforts to strengthen the fiscal system in the fight against inflation are impeded by the following underlined portion of Paragraph 34 of Article 141 of the Constitution, which reads:
«Nenhum tributo será exigido ou aumentado sem que a lei o estabeleça; nenhum Sierá cobra-do em oada
exercício sem previa !lU1Jorizaçã.o orçamemtária, res-salvada, porém, a tarifa aduaneira e o impôsto lan-gado por motivo de guerra.»
Thus, no tax can be collected in, say, the calendar year 1965 unless it has been authorized in the budget which is voted in the preceding year. In 1964, the consumption tax rates could be increased (for the period July 1 - December 31, 1964) because the Constitution was amended for that purpose . The increase in withholding rates in 1964 was not regarded as an increase in tax, but simply a change in method of collection.
It would seem that repeal of the indicated portion above is necessary if the federal fiscal system is to be used in a timely manner, either to halt inflation or to check a depression. Retroactivity is not the issue here; any taxes voted, in, say, mid-year, could be non-applicable to the first part of the year's income, or sales (though some power of retroactivity, even, is probably desirable with respect to the in come tax).
F - Taxes and Quasi-Taxes Excluded from the
Present Report
Social security taxes are collected outside the Budget by a number of more or less autonomous social security organi-zations or funds, which also disburse the social security benefits. Details on these inflows and outflows could not be assembled for the present report; it is said that the current deficit on these accounts aggregates to a few hundred billion cruzeiros.
The differential exehange rates eontrolled by the Gov-ernment result in an exeess of receipts that may be called quasi-tax revenue. The burden is mueh the same as that of a general tax on foreign trade. The present report does not attempt to estimate the amount or ecmsequenees of this quasi-tax.
Revenue from coffee retention fees is also not covered here.
SUMMARY
Tax poliey in Brazil, in September, 1964, has two dimen-sions. One of these eoncerns feasible time of enactment and application. The other concerns the objective of each reform measure - is it primarily to check the inflation, or is it pri-marily for other purposes ?
The time dimension divides the possible reforms into three groups: those that can be enacted within the next few months, those that must await amendments to the Constitution some time next year, and those that can be introdueed only gradually over a period of years as tax administration improves.
The dimension of objeetives, as just noted, divides the tax program into those measures that do, and those that do not, aet directly to cheek inflation. Those that do not so aet are still important even when control of inflation is the immediate goal, for they influence the publie's respect for its tax system and for its government's tax policy. When this respect is lacking, active fraud and passive disregard erode the tax system and eventually render even the most directly anti-inflationary tax measures inoperative. The tax provisions that do aim directly at controlling inflation are usually those dealing with large amounts of revenue. Sometimes, however, they are simply meth-ods that imply clearly that the governmert does not expect in· flation to continue indefinitely. Instances will be seen below in the arguments presented here against adapting the tax system to live permanently with inflation, and against indexed bonds.
For the reader's eonvenience, the r~commendations and suggestions made cr implied in Parts I, lI, and III of this report
have been extracted and assembled in the two dimensions of time and objective, in the table following.
As it happens, the primarily anti-inflati<ln measures all fali in time group nQ 1: those measures that can be enacted
during the remaining months of 1964. Hence the two-column format used for the Group 1 recommendations is dropped for Groups 2 and 3.
The brevity with which the measures are stated in this summary table necessarily carries an air of dogmatism that
ia not, it is hoped, found in the discussion in Parts I, II, and III .
SUMMARY OF RECOMMENDATIONS AND SUGGESTIONS
Group 1:
Those that can
be enacted during the remainder of 1964.
MeaSUJ:lelS de.signed p:rimarily
To check inflation
Income Tax:
(1) Lower the ba-sic (single-pers<ln) exemption to Cr$ . . 756,000, starting with 1965 incomes, adjust withholding scale ac-cordingly (Part I-A).
(2) Raise the 3 % , 5% and 8% bracket rates to 10% , start-ing with 1965 in-comes (Part I-D).
(3) Put the progres-sive-rate scale for 1965 incomes into terms of cruzeiros at the same Bcale as
for 1964 incomes
(Part I-D).
For other purposes
(a) Increase allow-ance for each depen-dent from 3/8 of the basic exemption to 1/2 that exemption. starting with 1965 incomes (Part I-B) . (b) Do not extend the 1963-1964 com-pulsory indexed loan
(Part I-F) .
(c) Repeal deduction of preceding year's income tax for com-putation of current year's taxable in-come of corporations
(Part I-I) .
(d) Allow
revalu-ation of inventories
to 1964 price leveIs
(4) Replace the com-pulsory indexed loan of 15 % to 25 % by a
supplementary tax designed to yield about half the rev-enue of the loan, and expressed as a per-centage of the entire regular r.ax due (not of that part paid directly) and with bracket rates (not ef-fective rates) (Part I-E) .
(5) Extend to the full year 1965, at the monthly rates for the last half of 1964, the withholding pro-visions of the July, 16, 1964 law, Art. 12
(Part I-F) .
(6) Replace compul-sory loan of corpora-tions by an increase in corporation in-come tax of some-what smaller amount
(Part I-I) .
(7) Raise the regular rate on corporations, for 1965 incomes only, by say, 5 per-centage points (Part I-I) .
free of tax, but retain traditional valuation method from this leveI.
(e) Repl!l.Ce excess profits tax by equiva-Lent revenue increase in regular corpora-tion tax (Part I-N).
(f) Put corporate income tax on a current-payment (pay-as-you-go)
(8) Do not allow skipping a year in transition of corpo-rations to pay-as-you-go basis (see Back-ground - F). (Part
I-N) .
Consumption tax
(9) Increase tax
rates on cigarettes, and distilled spirits, effective as soon as possible (Part TI-A).
(10) Extend the rate increases of the Law of August 28, 1964, indefinitely (P a r t
lI-A) .
(11) If rate of infla-tion has not greatly decreased by Novem-ber, 1964, increase rates of consumption tax by average of
100 per cent, as tem-porary measure for 1965.
Stamp Taxes
(no recommendations)
Taxes on Motor Fuels, etc.
(no recommendations)
State and Municipal Taxes
(no recommendations)
M:easures desigllied pl'imarily for purp(k§6S lother than
checking inflamn
Group 2
Those that cannot readily be enacted until 1965 or later, often be-cause amend-ment of the Constitution is required.
20
(a) Repeal present income tax code and substitute code based on draft code of July 30, 1964 (Dr. Bu-lhões P e d r e i r a ) after discussion and amendment. Som e details follow:
(b) Repeal the nor-mal (schedular tax-es) a n d increase progressive-rate sca-le to recoup revenue loss (Part I-C) .
( c ) Call in all bearer shares and replace them with nomina-tive shares; forbid issuance of bearer s h a r e s henceforth (Part I-F, Part I-L). (d) Adopt modified split for family in-come (Part I-G).
(e) Repeal legal-en-tity tax as to sole proprietorships and partnerships (Part I-J) .
(g) Include capital
gains and losses
frem shares, real es-tate, and other assets in individual income; adopt an averaging device; and possibly allow a slight reduc-tion of tax (gains) and tax relief (loss-es) (Part I-L).
Consumption Taxes
(h) Give credit for tax paid on purchase of machinery and
other items not
now creditable (Part lI-A) .
(i) Extend the con-sumption tax to cer-tain services, after amending the Consti-tution (Part lI-A) .
Stamp Taxes
(no recommendations)
Taxes on Motor Fuels, etc.
(j) Increase rates if more revenues is nee-ded for highway ex-penditures .
State and Municipal Taxes
(k)Transfer export-tax p o w e r from states to federa.l
gov-ernment
(Part UI-A).(1) Transfer rural-land-tax power from municipalities to fed-era.l or state govern-ments (Part UI-A) .
(m) Transfer death-duties power froro states to F ederal
Governroent (Part
TIl-A) .
(n) Allow state gov-ernrnents to impose certain overlapping
consumption taxes
(Part III-A) .
(o) Introduce for-rnulae type grants-in-aid: repeal present sharing of income and consumption tax-es and the 30 per cent rule for state sharing with munici-palities (Part ill-A).
(p) Reduce tax OD
transfp.r of real es-tate to almost 1 per cent : (Part lI-B, Part m-B).
General
(q) Repeal constitu-tionaI provision re-quiring tax rates of ODe year to be voted
in the preceding
year (Background,
Measures desi<gned primarily for purposes otiber tha'll
checkimg infIation
Group 3
Those that cannot be made fully effective until adminis-tration is grea-t1y improved though partial effectiveness may in some cases be
achieved in 1964 or 1965.
Income Tax
(a) Refine withhold-ing on wages and salaries, using either USA ar UK methods, ar a compromise
(Part I-F).
(b) Give prompt re-fund on overpaid tax
(Part I-F, Part I-N). (c) Define rules on depreciation (Part I-K) .
(d) Amplify regula-tions on capital gains a n d losses (Part I-L).
(e) Improve assess-ment of agricultural incomes (Part I-O).
Consumption Taxes
(no recommendations)
Stamp Taxes
(no recommendations)
Taxes on Moto?· Fuels, etc.
(no recommendatiQns)
State and Municipal Taxes
(f) Replace state turnover (cascade)
sales taxes with sin-gle-stage or value added taxes (Part ID-B) .
PART I
a
THE
INCOME
TAXAs the data in the Background section above indicate, thc income tax in Brazil supplies only a small fractioll of total Fed-eral, State and Municipal tax revenues. The relatively high personal exemption is one reason. Perhaps another reason is the reputedly small number of incomes that fall in the middle brackets, li indeed this is a fact. But one gains the impression that the problem is above all one of administration, alI the way from auditing taxpayers' accounts to facilitating payment cf tax and to punishment for those who evade . The present report does not go into detail on those issues (for example, to whut degree should imprisonment for fraud be decreed?), since tech-nical assistance on this aspect of taxation will be forthcoming in the near future from those who are expert on this subject. It can be said at once, however, that few if any of the measures recommended below can prove useful if there is not a notablc improvement in in come tax administration.
The following sections deal one by one with what appear to be the major issues of income tax policy at this time.
A draft of a complete new income tax law has just been presented (July, 1964) by Dr. José Luiz Bulhões Pedreira to the study committee on tax reform (of which he is a member) of the Getúlio Vargas Foundation, at the committee's request. This draft, entitled «Anteprojeto do Código do
is designed to replace in its entirety the present series of laws, amendments to laws, and amendments to amendments, which in the view of some BraziJian tax lawyers is no longer possible to work with adequately. The Project, besides being a com-plete recodification, intreduces several new conceptual and administrative ideas of importance, which will be noted in the appropriate sections below .
A major question of income tax policy in Brazil for 1965 is whether a new income tax cede should replace the old laws, and if 80, which of the novel features of the Bulhões Pedreira draft should be incorporated in the new code . It is a difficult decision, but the balance of advantage appears to lie with re-peal of the oId law and introduction of a new code based on the Bulhões Pedreira draft . Some modifications of that draft are suggested in the section below .
A codification of income tax law is to be found in Decree n9 51 . 900 of April 10, 1963, published in the Diário Oficial
of April 17, 1963 . Important amendments are contained in Law n9 4 . 357, of July 16, 1964, published in the Diário
Ofi-ciaI of July 17, 1964.
The income tax system in Brazil consists of (1) normal taxes, a series of flat-rate taxes on six different types of in-come, hereafter referred to as schedular taxes, (2) a super-imposed progressive-rate-scale tax on individuaIs. (3) a compulsory loan, imposed by laws n'l 1.474 of November 26, 1951, and nQ 2 . 973 of November 26, 1956, based on the
amount of income tax payable directly by the individual (that is, after deducting the amount of tax withheld at source), (4) a second compulsory loan, applicable to 1963 and 1964 wages and salaries, deducted at source, (5) a profits tax on alI legal entities, including sole proprietorships, partnerships, and cor-porations, (6) a compulsoy loan on profits of alI these firms, and (7) an excess profits tax on legal entities.
A - The Personal Exemption
Since 1961, the personal exemption and the limits of the rate brackets of the progressive-rate personal income tax in Brazil have been fixed in the law, not in cruzeiros, but in units of «fiscal minimum wage ».
Thc fiscal minimum wage is the largest monthly minimum wage in effect in Brazil (nonnally that for the State of Gua-nabara), rounded off to the nearest thousand cruzeiros. The monthly minimum wages have been changed by government decree each year, more or less proportionally to the change in the index of prices. 1 The most recent increase was from
Cr$ 21,000 a month to Cr$ 42,000 a month, effective for com-puting tax on 1964 incomes.
The personal exemption for a single taxpayer is stated by law to be 24 times the monthly fiscal minimum wage . Hence for 1964 incomes it is Cr$ 1,008,000 . 00 (about US$ 592 at the present free market exchange rate of 1700 cruzeiros to the doUar). In terms of internaI purchasing power, Cr$ 1,008,000 may be more nearly equivalent to US$ 800 or US$ 1,000. Apparently, not more than 10 per cent of the income recipients in Brazil are legally liable to pay income tax, under this exemption . 2
An immediate policy issue is whether more revenue should be obtained froro the income tu by lowering the exemption to, say, 18 times the monthly minimum wage, that is, to Cr$ 756,000. Also, the question arises: will a new higher minimum wage be decreed for 1965, with a consequent auto-matic increase in the personal exemption?
It should be recalled that a decrease in the exemption increases the amount of income tax due by all existing taxpayers besides bringing in new taxpayers whose incomes are below the old exemption .
In view of the great need for tax revenue, an immediate lowering of the exemption to 18, or at least to 20, times the fiscal minimum wage would seem to be warranted.
If a higher minimum wage is decreed for 1965, much of the force of the lowering of the exemption will be lost unless
1 See Note I - A, 1, in Appendix.
the exemption is continued in cruzeiros terms at Cr$ .. . . 1,008,000.00, discarding the wage-unit as the measuring rod for the exemption.
B - Exemptions for Spouse, Children, etc.
The schedular taxes allow no deduction for spouse, children, or other dependents. This disal10wance works a hardship on large families, which can be avoided by consoli-dating the schedular taxes into the progressive-rate global taxo
For this progressive-rate tax, tbe law (Decree 51.900, Art. 20) allo\Vs a personal exemption for the spouse one-half that of the basic exemption. For 1964 income, therefore, a
married couple receives an exemption of Cr$ 1,008,000.00
+
Cr$ 504,000.00 = Cr$ 1,512,000.00. An additional 3/4 of thc spouse's exemption is allowed for each minor or invalid son, unmarried daughter, widow without support or wifEi abandoned by husband without support, minor or invalid descendents without support from their parents . Hence, for each of these persons, the taxpayer obtains an exemption of 3/4 of Cr$ 504,000.00 or Cr$ 378,000.00.
If the basic exemption of Cr$ 1,008,000. 00 is lowered, to obtain more revenue, these other exemptions could be lowered proportionately. The fractions, 1/2, and 3/4 of 1/2, are pro-bably suitable, especially if the regime of split family income is adopted as proposed by the Project (see Part I-G below) , although consideration might be given the increasing the allowance for each dependent írom 3/8 of the basic exemption to, say, 1/2.
c -
The Schedula.,. RatesSchedule A : Int ercst on g..::ver.ilrnent obligaUons
,.
,
.
S chedule B: Certain other interest
S chedule C: Wages, salaries
S chedule D: Professional fees, etc. ( self-em-ployed)
Schedule E : Renis, etc .
S chedule F: Dividends , certain interest pay-ments, profits of business firms
S chedule G: Earni'ngs from cx tractive indus-tries, farming, cattle raising, eic.
3 per cent
10 per cent
1 per cent
2 per cent
3 per cent
no schedular tax; le-gal entity t .ax already paid (see Part I_I
below)
no schedular tax (tax relief)
Schedule H : Certail1l miscellaneollS investment 5 per cent income and is olated transactions
by thcGe not merchants .
The task of deciding into which schedule a particular kind of income should go is not always a simple one. The reader is referred to the lengthy description of the several schedules in Articles 2 to 10 of Decree n ~ 51.900.
D - The P1'ogresslve-Rate S cale
Since 1961, as noted above, the brackets of the progressive rate scale of the individual income tax have been set in tenns, not of Cruzeiros, b ut of so many t imes the fiscal (mont hly) minimum wage.
For 1963 incomes and 1964 incomes the scale is (Art . 26, Decree n'l 51 . 900) :
Up t o 24 times the fiscal minimum wage : Exempt
From 24 to 30 » »
» 30 to 45 :.
» 45 to 60 » »
» 60 to 75 » » » 75 to 90 :.
» 90 to 120 » »
» 120 to 150 » » 150 to 180 » » » 180 to 250 » »
» 250 to 350 » » » 350 to 450 » »
» 450 to 600 » »
» 600 to 800 » »
Above 800 » »
» » » » » » » » » » » » » » » » » » » » » » 3 % 5 % 8% 12% 16% 20% 25 % 30 % 35 % 40 % 45 % 51 % 57 % 65 %
A part of this tax is collected at the source . The remain-der is paid by the taxpayer the next year, upon receipt of a bill from the tax administration.
The rates in the lower brackets are so low (3 % , 5 % , 8 % ) that they must yield little revenue compared with the
trative burden that is involved. The rate scale could begin with, say, 10 per cent or 15 per cent without hardship to the low-income taxpayers, since the personal exemption could be
set at a leveI that would prevent hardship for the income classes in question . If the need for additional tax revenue is
great, it would appear that the personal exemption could be lowered somewhat (see above) and the starting rate set at, say, 15 per cent, especially if the schedular taxes were abol-ished. A tax credit could be granted for earned income, if desired.
The rate scale above , when translated into cruzeiros at the fiscal minimum wage of Cr$ 42,000 a month, becomes:
Up to Cr$ 1,008,000.00 .. , . ... ... ..
°
Above Cr$ 1,008,000.00 to Cr$ 1,260,000.00 ... 3%
» Cr$ 1,260,000.00 to Cr$ 1,890,000.00
..
, ... , . 5 %» Cr$ 1,890,000.00 to Cr$ 2,520,000.00 • • • • • o • • 8 %
» Cr$ 2,520,000.00 to Cr$ 3,150,000.00 • • • o ' • • • 12 %
» Cr$ 3,150,000.00 to Cr$ 3,780,000.00 ... , . 16 %
» Cr$ 3,780,000.00 to Cr$ 5,040,000.00 • • • o ' o • • 20 %
» Cr$ 5,040,000.00 to. Cr$ 6,300,000.00 o • • o ' • • • 25 %
» Cr$ 6,300,000,00 to Cr$ 7,560,000.00 · ... 30 %
» Cr$ 7,560,000.00 to Cr$ 10,500,000.00 • • • • • o • • 35 %
» Cr$ 10,500,000.00 to Cr$ 14,700,000.00 • • • o • • , • 40 %
» Cr$ 14,700,000.0 to Cr$ 18,900,000.00 ' " • • o • • 45 %
» Cr$ 18,900,000.00 to Cr$ 25,200,000.00
.. .. . ...
51 %» Cr$ 25,200,000.00 to Cr$ 33,600,000.00 · ... , .. . 57 %
These rates are bracket rates, not effective (average) rates. They do not show what percentage of an individual's income is taken in taxes . The bracket rates are the significant rates in estimating the incentive effects of the tax (incentive to work, incentive to take investment risks); the effective (average) rates are the significant ones for appraising the degree of hardship caused by the tax o For example, a single individual with a yearly taxable income, after all deductions, of 150 times the monthly minimum wage is paying a marginal rate of 25 % on the highest part of his income, but an effective (average) rate of only 13.22 per cent on his entire in come : Cr$ 832,860 tax on Cr$ 6,300,000 of income. This is the annual salary of a fairly sucessful accountant, ar a fairly high-Ievel civil servant
(see Part I-F below) .
If the fiscal minimum wage is raised again, the brackets change, of course, in terms of cruzeiros, with consequently smaller revenue than otherwise, in nominal terms. li the indi-vidual income tax is not to lose an appreciable part of its present power to check inflation, the present cruzeiros brackets will have to be retained, for 1965 incomes, which means that either the fiscal minimum wage will have to remain unchanged in
1965, or the income tax law will ha ve to be changed to suspend ar remove the minimum-wage unit for the brackets. In any event, as soon as stabilization is achieved, elimination of the minimum-wage unit for the brackets would be testimony that the government believed the stabilization was not merely temporary.
E - Compu lsoTy Loans on IndividuaIs
Under laws enacted in 1951 and 1956 (see above) the individual income taxpayer is subject to a compulsory loan of from 15 per cent to 25 per cent of the amount of income tax that remains for him to pay after withholding. The scale for the compulsory loan is as follows:
Income tax remaining
to be paid after with-holding
Cr$ of such tax
°
to 20,000Above 20,000 to 250,000
Above 250,000 to 1,000,000
Above 1,000,000
Compulsory loan,
computed as percentage
of such income tax
none
15%
20 %
25 %
These rates are effective rates, not bracket rates. l i one's tax is Cr$ 20,000, one pays no compulsory loan. If it is Cr$ 20.001, one pays Cr$ 3,000.00 compulsory loan. The taxpayer with an income slightly above the amount that results in non-with-held tax of Cr$ 20,000 would be well advised to reduce his
income and thus increase his welfare, unless he viewed thc bonds as worth what he had to pay for them.
For 1963 and 1964 income years, an additional compulsory loan, collected at source on wage and salary incomes, has been in effect. The rate is 3% per cent a month on the excess of the monthly wage or salary ever the monthIy perSQnal exemp-tion and allowance for dependents.
Until recently, these «loans» were not indexed and evident-ly were regarded by most taxpayers as being about equivalent to another tax. Even as indexed loans, they carry a strong tax eIement, which may be measured roughly by what the individual would be willing to pay outright tax in order to be
free of the compuIsory loan requirement. Moreover, a. govern-ment that issues indexed loans at a time when its own financiaI policy is causing prices to rise is thereby storing up difficulties for the years ahead; the very issues of indexed loans may, beyond some point, make fulfillment of the index promise impracticable, as the amount to pay in current cruzeiros be-comes too large to be politically or socially acceptabIe.
the second loan deducted at source on salaries and wages. The graduation of the first lcan by entire income rather than by brackets of income has severe effects at the dividing points.
In view of these facts a simple fiscal system and a feeling of increased equity among taxpayers could be achieved by re-pealing the compulsory loan provisions and making up most of the loss in revenue by an evenly distributed increase in inccme tax rates.
F - Withholding at Source on Wages and Salaries
Until July, 1964, withholding of income tax on wages and salaries had been at a low rate, at or slightly above 1 per cent for most employees. The July 1964 law (Art . 12) imposed a much heavier withholding tax <ln salaries and wages, ranging up to 10 per cent on monthly wages or salaries of more than 15 times the fiscal minimum monthly wage, as follows:
Up to 4 times the fiscal minimum wage: former withholding rate
Above 4 times to 5 times the fiscal minimum wage: 2 %
Above 5 » » 8 » » » » » 4 %
Above 8 » » 10 » » » » » 6 %
Above 10 » » 15 » » » » » 8%
Above 15 times the fiscal minimum wage: 10 %
This provision is effective only from July 1, 1964, to De-cember 31, 1964.
If the taxpa~r's return filed in 1965 shows he has been
subject to excess withholding, he can credit the excess against tax on 1965 income or can apply for a cash refundo
The significance of this new withholding schedule can best be seen by some illustrative examples derived from data supplied by the Ministry of Finance, and reproduced below. These illustrations are not quite complete in that they do not
include the second compulsory 10an referred to in Section E above, withheld in 1964 ou 1964 wages and salaries.
The «deductions » stipulated in these examples are set at leveIs that would not be unusual for such taxpayers.
These ilIustrations assume that the new, high withholding rates of the Law of July, 1964, are in effeet for the fuIl twelve mcnths of the taxpayer's iucome year, instead of the aetual
1964 experience which consists of (1) withholding at the low rate mentioned above for January to June plus (2) withholding at the new high rate, July to December . This full-year assumption of high-rate withholding is ma de in order to present the burden that would exist if the present withholding rules were maintained throughout a year. In other words, we may view these examples as showing what would be the burden on 196·5 incomes provided the rate sehedule w.ere unehanged and the withholding rates were maintained for all twelve mopths of 196·5 . That part of the tax payable direetly by the taxpayer (not colleeted at source) can be thought of as being paid by him in 1966 .
Taxpayers A and B might be, for example, bank clerks in the middle or upper grades . Taxpayers C and D might be fairly suecessful accountants or fairly high-Ievel civil servants. Tax-payers E and F represent the highest paid civil servants. Tax-payers G and H are largely figments of the imagination; they have been selected to show what tax would be payable by an employed individual if bis salary were so high that it put him in the top (65 % ) braeket .
Taxpayers A and B pay much more than half their total tax plus loan by withholding (and it must be recalled these data do not inelude the second eompulsory loan, which is collected at source). So does taxpayer D. But C (no children) pays about half through withholding. Taxpayer E pays about
44 per cent through withholding, even though his income is very high (over Cr$ 10,000,000 a year); his counterpart F (no ehildren) pays 50 per cent through withholding. The hypo-thetica1 G and H taxpayers would pay only 21 per cent and 22
per cent, respe ctively, through withholding .
INCOME TAX FOR 1965 BASED ON THE SALARIES OF 1964
Taxpayer A
Married, no ch ildl'en
SaJary Cr$ 300,000.00 per month
S chedule C Cr$ 3,600,000.00
Deductions . .. . . ... .... ... .... ... Cr$ 3( 0,000.00
Net earnings .. .... . ... . .... CrS 3.210,000.00
ScheduJar tax - 1% . ... ... . . ... . ... . .. Cr$ 32,100.00
Gr: ss in come ( net earni ngs of
schedule C) ... .... ... . Cr$ 3,240,000. 00
Wife allowance . . . ... . . Cr$ 504,000.00
Other dedu ction'S Cr$ 324 ,000.00 Cr$ 828,000 .00
Net income ... . .. . .. . .... . . ... Cr$ 2,112,000.00
Complementary tax . . . .. . .. .... .. . .. . . .. . . .. ... Cr$ 80,820,00
Total t 3X ... . ... . . .. . . .... . .. . .... .. ... . .... ... Cr$ 113,220.00
Tax withheld at the source ... .. . ... . .. . ... Cr$ 75,200.00
B alance of tax to be paid in 1965 Cr$ 38,020.00
C.mpulsory loan to be paid in 1965 ( a percentage of the
immediately preceding item) .. .. ... . ... Cr$ 5,700.00
Total to be paid in 1965 on 1961 inoome ... Cr$ 43,720.00
Total tax plus 15% - 25 9/; compulsory Joan .. . . .. . . Cr$ 118,920.00
L
Taxpayer B
Married, two children
Sala.ry Cr$ 300,000.00 per month
Schedular tax .. ... .. . ... .. .. .. . ... ... . ... Cr$ 32,400.00
Gross incomc as above. .. . . .. ... . .... Cr$ 3,240,000.00
Fa m~il y al1Mva.llces:
Wife . Cr$ 504,000.00
Childl'en . . .. ... . .. .. Cr$ 756,000.00
Cr$ 1,260,000.00
Other deductions ... Cr$ 321,000.00 Cr$ 1,584,000.00
Net income ... . .. .. ... . .. . .. Cr$ 1 ,656,000.00
Complementary tax . .. . . ... . .... . ... .. .. Cr$ 19,260.00
Total tax . .... . ... .. ... . ... . .. . ... . ... Cr$ 51,660.00
Tax withheld at the source ... .. .... . .. ... .. . .. .. ... Cr$ 34,908.00
Balance of t·ax to be paid in 1965 . . . . . . Cr$ 16,752.00
Compulsory los.n to be paid in 1965 (none, because
