Objectives. Background TAX REFORM, INCOME DISTRIBUTION AND POVERTY IN BRAZIL

(1)

Encuentro Regional Modelos EGC

-CEPAL/BID/CEPII. Santiago, abril 2007 1

TAX REFORM, INCOME DISTRIBUTION

AND POVERTY IN BRAZIL

Joaquim Bento de Souza Ferreira Fo.

Escola Superior de Agricultura “Luiz de Queiroz”,

Universidade de São Paulo

Carliton Vieira dos Santos

Sandra Maria do Prado Lima

RESEARCH FUNDED BY THE PEP RESEARCH NETWORK

PROJECT PR-MPIA-340

Objectives

Address the potential impacts of changes in

the Brazilian indirect tax system upon poverty

and income distribution in Brazil.

Analyze regional effects inside the country.

Reference year: 2001.

Background

The 1988 Brazilian Constitution changed the tax

system.

Diagnostics: tax system complex, expensive,

inefficient, socially unfair and stimulating of “ fiscal

war” among states: little attention to distributive

effects.

Some studies (partial equilibrium) point to the

regressive effects of the indirect tax system in Brazil.

Poverty in Brazil: has also regional implications.

Indirect tax burden affects more the households in

the poorer regions: importance of analysis at

regional level.

Evolution of the tax burden in Brazil: 1947- 2004

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 19 47 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Year % G D P

(2)

Share of the direct and indirect taxes in the total of

the tax collection in Brazil: 2001

Direct taxes

30.2%

Indirect taxes

69.9%

Distribution of the tax burden according to the

incidence base: 2001

Tariffs and Export Taxes

2.3% Other 5.2% Property Taxes

3.0%

Income and Profits 18.4% Payroll 21.8% Commodities and Services 49.4%

Poverty in Brazil: a brief summary

One of the worse income distributions in the

world.

Inequality also appears in a regional basis.

Share of income classes in population and in income. Brazil, 2001.

10.7 ₈ 16 7.3 11 7.9 12.9 7.5 7.7 10.9 0.9 1.8 5.2 3.1 5.8 5.1 11.1 8.7 12.7 45.7 0 10 20 30 40 50 60

POF[1] POF[2] POF[3] POF[4] POF[5] POF[6] POF[7] POF[8] POF[9] POF[10]

%

% Population % Income

First 5 income classes: 52.6% of population, 17% of total income

Highest income class: 11% of population 45% of total income. GINI = 0.58

(3)

Regional Poverty Figures 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 1 Rondo nia 2 Acr e 3 Am azon as 4 Ro raim a 5 Pa ra 6 Am apa 7 Toca ntins 8 Mar anhao9 Pia ui 10 Cea ra 11 RG Norte 12 Pa raiba 13 P ernam buco 14 A lagoa s 15 S ergip e 16 B ahia 17 M inasG 18 Esp Santo 19 Rio Jane iro 20 Sa oPaul o 21 Pa rana 22 St aCat ari 23 RG Sul 24 M tGrSu l 25 Mt Gros so 26 G oias₂₇DF In d ex

Population Proportion of poor households in regional population Regional Average Poverty Gap

N + NE regions

Amazonas Para

MtGrosso MinasG Bahia MtGrSul Goias Maranhao RGSul Tocantins SaoPaulo Piaui Rondonia Roraima Parana Acre Ceara Amapa StaCatari Pernambuco Paraiba RGNorte EspSanto RioJaneiro Alagoas Sergipe DF 0.14 (minimum) 0.24 0.35 (median) 0.51 0.58 (maximum)

Proportion below poverty line

Methodology: AGE model and linked

micro-simulation model

A general equilibrium model of Brazil

(TERM-BR): linearized model.

Static

Inter-regional (trade flows link the regions)

Bottom-up

27 regions, 42 industries, 52 commodities, 4 final

demanders, 10 labor occupations (wage classes),

2 margins commodities.

Calibrated with 2001 Brazilian Input-Output

data.

The Micro-simulation model: Data

sources.

National Household Survey – PNAD, 2001: Wage by

industry and region, personal and household

characteristics.

Household Expenditure Survey – POF, 1996

After data preparation:

112,055 Brazilian households;

263,938 adults (older than 15 years);

41 activities;

41 commodities;

27 regions.

(4)

Individuals and households

Each household

has 1 or more adults with his own occupation and wages,

zero or more children under 15 years (who do not work).

Household income is pooled and consumption

bundle is common.

Alternatives approach: head of the family income.

Brazil, 2001: share of the head of family income in

total household income is 0.6540.

Income changes tracked from persons to

households. This procedure softens policy shock

effects.

Income computed on a adult equivalent basis.

Allocation of jobs in the model

Changes in labor demand from the CGE

model must be communicated to the

Micro-simulation model, by sector and region.

Who gets hired, who gets fired?

They all do: the job relocation mechanism is

based on changes of sample weights.

Model closure: long run.

Capital stocks in each industry are endogenously determined,

flowing between industries and regions driven by a fixed rate of

return.

The level of investment by sector is endogenous, and follows the

capital stock in each activity.

The labor force is free to move between sectors and regions, driven

by real wage differentials. The total employment is fixed nationally.

Real wages vary to adjust labor demands at regional level.

Government consumption was kept fixed at all levels. Fiscal

neutrality obtained through an

endogenous direct tax rate.

The household real consumption is endogenous.

The Balance of Trade/GDP ratio is exogenous. Household real

consumption and investment, then, are the two endogenous terms

of absorption, adjusting to satisfy the balance of trade constraint.

Simulations

Experiment 1 : 50% reduction in the indirect

tax rates of the main household consumption

products.

Experiment 2 : 50% reduction in the indirect

tax rates over the main inputs used in

Agriculture.

(5)

Real Income Variation = Nominal income - Consumption bundle price variation

0.00 0.50 1.00 1.50 2.00 2.50 3.00

POF[1] POF[2] POF[3] POF[4] POF[5] POF[6] POF[7] POF[8] POF[9] POF[10]

Household Income Class

% v ar ia ti o n

Food Scen Intermediate Scen

Poorest

Richest

Results: aggregate poverty and inequality

indexes. Percentage changes.

Experiment 1

Experiment 2

Experiment 3

Proportion of poor households

-0.86

-0.46

-0.55

Proportion of poor persons (HR)

-0.91

-0.51

-0.58

Average poverty gap

-1.46

-0.63

-0.47

Average squared poverty gap (FGT)

-1.40

-0.64

0.00 GINI index

-0.04

-0.06

0.13

Food Ag inputs

Percent change in the Headcount Ratio

-4 -3 -2 -1 0 1 2 1 Rondo nia 2 Ac re 3 Am azon as 4 Ro raim a 5 Par a 6 Am apa 7 Toc antin s 8 Mar anha o 9 Piau i 10 Ce ara 11 RG Norte 12 Pa raiba 13 Pe rnam buco 14 A lagoa s 15 S ergip e 16 B ahia 17 Min asG 18 E spSant o 19 R ioJanei ro 20 Sa oPau lo 21 Pa rana 22 Sta Catar i 23 R GSul 24 Mt GrS ul 25 M tGros so 26 G oias₂₇ DF BRA ZIL % ch an g e Experiment 1 Experiment 2

Exp1 Exp2 Exp3

Number of persons leaving poverty 573,591 330,993 370,807

Model results. Variation in the number of poor households, by income class.

Income class Experiment 1 Experiment 2 Experiment 3 % change Number of households % change Number of households % change Number of households 1 POF[1] (poorest) -0.23 -12,928 -0.12 -6,817 -0.62 -35,158 2 POF[2] -0.25 -8,770 -0.15 -5,245 -0.27 -9,479 3 POF[3] -0.89 -39,098 -0.34 -14,963 -0.64 -27,910 4 POF[4] -4.16 -42,576 -2.71 -27,733 -3.32 -33,952 5 POF[5] -5.27 -32,065 -3.9 -23,741 -2.26 -13,739 6 POF[6] -3.47 -5,090 -1.17 -1,713 5.28 7,751 7 POF[7] 2.65 1,340 1.49 751 29.54 14,921 8 POF[8] 51.82 1,413 33.88 924 192.24 5,244 9 POF[9]* _* _{1,233 * 850 * 4,804} 10 POF[10] (richest) * 989 * 825 * 3,835 Total (households) - -135,552 - -76,862 - -83,682

(6)

Indirect Tax Revenue variation.

-12 -10 -8 -6 -4 -2 0 1 Rondo nia 2 Ac re 3 Am azon as 4 Ro raim a 5 Par a 6 Am apa 7 Toc antin s 8 Ma ranh ao 9 Pia ui 10 C eara 11 RG Norte 12 P araiba 13 Pe rnam buco 14 A lago as 15 S ergipe 16 Ba hia 17 Min asG 18 E spSan to 19 Rio Janei ro 20 S aoPa ulo 21 P aran a 22 St aCa tari 23 R GSu l 24 M tGrSu l 25 M tGrosso26 Goi as 27 D F % v ar ia ti o n Experiment 1 Experiment 2

Objectives. Background TAX REFORM, INCOME DISTRIBUTION AND POVERTY IN BRAZIL

TAX REFORM, INCOME DISTRIBUTION

AND POVERTY IN BRAZIL

Joaquim Bento de Souza Ferreira Fo.

Escola Superior de Agricultura “Luiz de Queiroz”,

Universidade de São Paulo

Carliton Vieira dos Santos

Sandra Maria do Prado Lima

RESEARCH FUNDED BY THE PEP RESEARCH NETWORK

PROJECT PR-MPIA-340

Objectives



Address the potential impacts of changes in

the Brazilian indirect tax system upon poverty

and income distribution in Brazil.



Analyze regional effects inside the country.



Reference year: 2001.

Background



The 1988 Brazilian Constitution changed the tax

system.



Diagnostics: tax system complex, expensive,

inefficient, socially unfair and stimulating of “ fiscal

war” among states: little attention to distributive

effects.



Some studies (partial equilibrium) point to the

regressive effects of the indirect tax system in Brazil.



Poverty in Brazil: has also regional implications.



Indirect tax burden affects more the households in

the poorer regions: importance of analysis at

regional level.

Evolution of the tax burden in Brazil: 1947- 2004

Share of the direct and indirect taxes in the total of

the tax collection in Brazil: 2001

Direct taxes

30.2%

Indirect taxes

69.9%

Distribution of the tax burden according to the

incidence base: 2001

Poverty in Brazil: a brief summary



One of the worse income distributions in the

world.



Inequality also appears in a regional basis.

N + NE regions

Methodology: AGE model and linked

micro-simulation model



A general equilibrium model of Brazil

(TERM-BR): linearized model.



Static



Inter-regional (trade flows link the regions)



Bottom-up



27 regions, 42 industries, 52 commodities, 4 final

demanders, 10 labor occupations (wage classes),

2 margins commodities.



Calibrated with 2001 Brazilian Input-Output

data.

The Micro-simulation model: Data

sources.



National Household Survey – PNAD, 2001: Wage by

industry and region, personal and household

characteristics.



Household Expenditure Survey – POF, 1996

