MONTH INTERVIEW – Eduardo Fleury: Many of the tax incentives on consumption benefit the higher income classes most

For the economist and tax lawyer, it is easier to give money back to people from low-income classes than to keep benefiting the elite

The tax reform under discussion in Brasilia has good chances of being approved this time and shall improve the consumer’s life in a general way, even if it does not solve all the country’s problems, says Eduardo Fleury. He approaches a series of distortions that the tax reform proposals under discussion tend to fix and explains why changes in controversial themes, such as the taxation of basic food basket and books, can make sense in terms of social redistribution. Many of the current exemptions, says the expert, are concentrating income.

In the interview, the tax lawyer and economist with a master’s degree in International Taxation from the University of Florida, also explains the proposals for constitutional amendments prepared by the Instituto Escolhas with its technical advice. The Escolhas’ proposals to improve the land tax and to establish taxation with the objective of reducing greenhouse gas emissions subsidized the document Nine proposals for a Sustainable Tax Reform delivered by 12 institutions, including the Escolhas, to the parliamentarians of the Environmentalist Parliamentary Front last August 25 to be considered by the National Congress.

In the Escolhas no Ar podcast, Eduardo Fleury explains about the tax reform and sustainable development. Listen on the platforms, clicking here: Soundcloud and Spotfy

Instituto Escolhas – How can we define, in a general way, the purpose of the current tax reform in discussion in Brasília?

Eduardo Fleury – The tax reform under discussion does not come to resolve the complaint that much is heard that we pay too much taxes. The idea of the proposals both from the government and those that are in the Congress, in general, is to be neutral, by the taxation point of view. We will continue collecting the same thing as before, but from a tax system that is more rational, that generates less indirect costs for society.  Companies today, for instance, spend a lot to manage a chaotic tax system like ours. Those indirect coasts, when they spread through the system, also damages the consumer. That is why there is the idea of unifying the several taxes that are charged over the consume. From this, it diminishes the complexity of the system and makes it more efficient and rational. That reform’s great goal is basically that. From the specific point of view, the intention is to unify the IPI, the ICMS, the ISS and the PIS/Cofins. The intension, at the end of the day, is to benefit the consumer.

Instituto Escolhas – Do you agree with the criticism that say that the discussion is only on the consumption taxation, instead of being enlarged also to the question of the income taxation, of the big fortunes, and of other sectors?

Fleury – I do not agree with this criticism. Because the government intends, in the next step, to put these other issues under discussion. It is always complicated. On one hand, many people say that only this is being discussed, on the other, when the other themes come in, that the discussion is very extensive. Some things can even be complementary from a political point of view. Suddenly, by adjusting something in relation to consumption, the question of income can also be improved. Suddenly, by adjusting something in relation to consumption one can also improve the question of income. Income tax and inheritance are issues that Brazil needs to deal with. I do not think inheritance tax is a way to raise money from the point of view of distributive justice. But it gives an important signal to society. I am in favor of collection, although I recognize that it will not do social justice or distribute income. I have a lot of experience in the United States and look what the relationship between taxation and donations has done among Americans. It has created an important culture in the country, although it is motivated by tax issues. Instead of paying tax to the government, people prefer to create institutions and donate. It does not always work, but the thought of giving has been created in the nation. In Brazil, one does not have this vision in relation to donations, so I am in favor of a tax on it. As for income tax, we have several problems to solve, among them the taxation in higher income segments.

Escolhas – The current proposal of tax reform, in your assessment, which distortions will resolve?

Fleury – There is a series of distortions to be dealt with. The first one is regional. Imagine that I am going to install one plant in some State of the Northeast, or in any other region of the country. And I will do it because I will have fiscal incentive there. You produced the pieces in São Paulo and took them to Bahia, you assembled the car there and brought it back. It does not seem to me a very rational process. The correct thing, that many countries do, is to eventually transfer money to the State of Bahia, create efficient and qualified labor there, with training and education, besides building good roads and legal logistics. In other words, economic advantages are created for a plant to be installed there. The policy to attract investments must be detached from the tax. You must know exactly what the regional vocations are so that a situation is not forced just because of the tax exemption. The current reform intends to reduce this too.

Escolhas – There are also the distortions on the consume. How will they be resolved?

Fleury – Many of the tax incentives on consumption benefit most the higher income classes. For example, the case of the food basket. I studied this recently. If you put a 25% aliquot over the food, because some have exemptions, it will generate a price increase, it is true, but it will be too small in relation to what is being talked. In our calculations for the World Bank we are reaching values, in the case of fruits and vegetables, where the impact is greater, of 14%. Others reach impacts of 2% to 5%. There is no doubt, it is an impact, of course. The problem is that the government stops collecting from R$ 17 billion to R$ 18 billion per year with the exemptions on food. When you analyze the Family Budget Survey and you see people’s consumption, it is verified that the money that is no longer collected goes almost 60% to the middle and upper class. We are talking about my steak and my Italian pasta. It is ok. It can be argued that the other 40% still goes to the lower income classes. But we are talking about families that win around R$ 4 thousand to R$ 5 thousand.  Let us consider that they are really classes of more income, but how do you intend to solve this by the tax reform? We can charge tax from everyone and use a system that already exists, which is the São Paulo invoice [tax return] to correct distortions. We have a tax technology that does not exist anywhere in the world, even because our system is indeed complicated. Therefore, from the CPF on the note or through a QR code on the note you will be able to return the money to people enrolled in social income transfer programs. In addition to returning the tax money, you can even advance it to people if necessary. The issue of books, as foreseen in the proposal of the creation of CBS [contribution on goods and services from the junction of PIS/Cofins] follows the same reasoning. The data show that who earns over $ 15 thousand per month, and who is rich in terms of Brazil, is responsible for 72% of book consumption. The one who wins until $ 5 thousand buys 5% of books. In other words, it is not the tax exemption that solves this problem. The question is another. But once, in this case, I am concentrating income. I am not talking about taking the exemption from the book, but you need to think a little bit. It is easier to return the money to the person who buys the book and has enrolled in the income programs than to continue benefiting the higher income classes. There is the custom of putting a lot of blame on the tribute, but we have to treat the different as different.

Escolhas – And about the CPMF, is it a good tribute? Does it solve some distortion?

Fleury – It is a good tribute to be thrown away, he laughs. It does not sustain itself for several reasons. It promises a low aliquot to collect a lot, but it cannot do that. It does not deliver what it promises. To collect more money, you will have to increase the aliquot, which will cause distortions in many ways. One of them is to increase the cost of money. In some financings this amount can almost double. It took us so long to start having a reasonable interest rate range, a little more rational, and now we are going to increase that cost? This is one of the important distortions that CPMF creates.

Escolhas – You advised Escolhas on the elaboration of proposals to make the tax reform more environmentally sustainable. What were those proposals?

Fleury – It is important to look at the tax reform and to face, even with mechanisms that in a certain way the Constitution already foresees, this issue. One of them is the case of the selective tax. As a general rule, and although with a little collection purpose, it aims to inhibit behaviors that give losses to society. Pollution, for example, fits perfectly in this context. It has a cost for the whole society that finally does not appear in the price. The manufacturer of some product that pollutes is not impacted. Then, with a selective tax, you can adjust the price of a certain product to a truer level. Within the economic theory, you are embedding pollution within the cost of the product. Besides discouraging consumption as well because people will realize that it’s really more expensive. We are proposing a contribution, which is a tribute too, which will act exactly on the emission of greenhouse gases. As a tributary observer, I have seen in other parts of the world, inclusive in Europe where the carbon market is more structured, that it is not managing, alone, to solve the problem. That is why the characteristic of this contribution is to use the amount of the collected money for the environment. If we get success on this taxation, its collection will even decrease, in fact. The amount collected will not finance the governments, but the companies or institutions that will work to reduce their own emissions of greenhouse gases. It will finance the investment.

Escolhas – In practical terms, we are talking about a tax on gasoline. Will it be paid at the pump by the consumer?

Fleury – Basically you will work with gasoline, but in some cases, you can tax the emission itself. We have proposed both possibilities. In the case of fuel, you tax gasoline at the pump. Or simply, if you have another polluting sector, you can go straight to the source of the emission, measure it and tax it. A modern plant that generates little pollution will be benefited in some cases. It is true that you run the risk of putting a little more complexity in the system with this, on the contrary of what the tax reform intends in a general way. But it is interesting to say that this mechanism, although more complex, starts to have a function. One of the problems of our complexity today is that it does not have a truly clear function. Someone can make a simple design of this type of taxation just like other countries have.

Escolhas – Besides gasoline taxation, does another mechanism involve the ITR (Rural Territorial Tax)?

Fleury – The ITR is an ineffective tax. In practice it has never worked. It collects little and is not effective, for several reasons. Our proposal is to divide the ITR in two in practice. We will have the IPTR (Rural Territorial Property Tax) and the current ITR itself. In the United States, for example, the rural and urban property taxes are the same thing. It is even difficult for you to separate the collection data from both. What we have changed is that the collection on the property, today with the federal revenue, turns to belong to the municipalities. Because, in principle, they will have much more interest in making a bigger collection. Of course, this can influence the price of land, as it happens with the IPTU in cities. The purpose is not to collect, but to make it work in favor of the environment. I even personally put an extra mechanism. If the production methods are sustainable too, in the case of organic agriculture or something similar, the farmer will gain a higher grade on the production side. In the practice, it is as if he already had a certification and this can be shown abroad, for example, in markets that are giving a lot of value to more sustainable productions. Of course, all these definitions will have to be established by the legislator.

Escolhas – These two proposed mechanisms, then, if approved and well implemented, will leave the tax reform more environmentally and socially adjusted?

Fleury – Environmentally, yes. In the social issue you need to be more careful, because not everything is the fault of the tribute. Here in the United States [in the interview, remotely, Eduardo Fleury was in Chicago], today, we have basically two worlds. Walmart’s cashier and the well-educated, high-income group of people. But that is the result of an economic process that goes from China to other variables. It has nothing to do with tribute. The role of the tribute is also to show that justice is done. Would be taxed dividends? I think that one should decrease the tax on the company’s side and increase on the dividends, there is no doubt, this should be done. Now, mainly in Brazil, this taxation on dividends will collect too little. It will not even be able to sustain the social program that the government wants to maintain. To tax the land, for instance, is perfectly normal. Our proposal, by giving a more rational look to the use of that land is essentially more sustainable.