Why are the taxes in Brazil so high?
Everybody knows that tax burden in Brazil is high and foreign businesses invest much time and resources in finding ways reduce taxes. This article will explain you why these taxes are so high.
Brazil's high tax burden that surpasses 33% of the country's GDP is loved and hated by foreigners as well as locals. Hillary Clinton has even been stating that she admires the Brazilian tax policies while Apple CEO Steve Jobs has put the opening of a retail store in Brazil on hold due to the high tax burden.
Despite having one of the highest taxation regimes in the world, public investment levels in Brazil is one of the lowest.
Paying for improved life quality for lower classes
The Brazilian government spends money as fast as it collects it. Socialism has for long been the most secure way for politicians to be re-elected in Brazil. Even the most conservative politicians in Brazil will have to talk about social inclusion in order to stand a chance to be elected.
The general trust in politicians in Brazil is remarkably low, only 14% of the population state that they trust the parliament.
It is mandatory to vote in Brazil and as in any other democracy, every vote counts the same and since a large part of the population belongs to the poorer social classes socialism is a secure way for re-election.
Social welfare programs like Bolsa Família were a direct reason to ex-president Lula's re-election in 2006. While Bolsa Família has reduced short-term poverty for 44 million Brazilians by direct cash transfers, investment into public health system and other public tasks are not prioritized.
Bolsa Família alone is estimated to cost about 0.5% of Brazil's GDP each year and is collected through taxes. Parts of the country with lower income also tend to have other problems that need to be addressed using tax payers money:
- High crime rate
- High unemployment rates
- High adoption of underground economy
- Reduced health conditions
A large portion of the tax money collected from the legitimate part of the economy is used to improve life quality for poor people.
Underground Economy
The tax level in Brazil is reflected on its underground economy which occurred as a result of Plano Real and estimated to be as much as 40% of the Brazilian GDP in 2004. Since 2004, Brazilian GDP has grown significantly and today the underground economy is estimated be about 20% of the GDP.
A majority of underground economy activity is undertaken by the lower-middle classes who will often not declare their wages as well as buying illegitimate products and services in the underground market.
The widely spread underground economy has created imbalances in the Brazilian business environments clearly limiting the growth of companies who play by the rule and pay their taxes.
In terms of the underground economy, Brazil finds itself in a Catch-22. High taxes and only a few tax evaders punished, leading to social acceptance of tax evasion. While underground businesses manages to sell cheaper, businesses that play by the rules sell less.
Lower profits for businesses stifle investments and hiring in the formal economy. With fewer formal jobs available, consumer spending drops, causing law-abiding companies to commit tax fraud in order to survive.
While Brazil seems like one of the most developed countries in the BRIC block, the underground economy of India and China are tiny when compared to Brazil's.
Protectionism
Brazil has moved beyond the period of strict control of imports, applied in the eighties and seventies, however it often seems like Brazil has not moved too much over the last decades.
During the financial problem the world experienced in 2009 Brazil's first move was to put restrictions on 60% of imports in order to protect the local industry. This move towards protectionism was highly disputed by the major Brazilian media and industrial organizations in Brazil arguing that the move seemed like a cold wind from the past.
Protectionism is an old strategy to mature the industry in a country before exposed to real competition from foreign and more efficient industries. The problem in which Brazil finds itself is that while they advocate free trade for export of their commodities to countries like USA, they do not embrace free trade when industrialized products are coming back to the country.
Brazilian industry is having a hard time delivering the same quality and price as foreign businesses due to the local tax burden, so the only way for the Brazilian government to make sure Brazilian industry survive is by adding taxes on the edge of what the international society accepts whitout losing their free trade status at the same time as they implement dramatic tax reduction for companies that export product or services from Brazil.
Conclusion and Predictions
The simple reason why the overall taxes burden in Brazil are so high is simple: The government needs the money and Brazilians do not produce enough value per capita to handle the country's challenges.
As an underlaying problem, Brazil has not managed to achieve institutional stability. Courts, schools, hospitals and specially law enforcement are struggling to bring solid bases of stability to Brazil.
The Brazilian tax burden will not decrease before the country manage to find a solid bases of stability. This might only happen when the majority of the Brazilian population is lifted out of poverty or when social diversity be commonly accepted.
At the moment a big portion of the Brazilian population provides a minimal contribution to the overall tax revenue, making it easy for the politicians to justify high taxes as a majority of the population see increased tax revenue for the government a way to improve their life quality.