[{"jcr:title":"Bills regulating wealth tax diverge on what “wealth” should be","cq:tags_0":"area-de-conhecimento:políticas-públicas","cq:tags_1":"area-de-conhecimento:economia","cq:tags_2":"tipos-de-conteudo:insper-conhecimento"},{"richText":"A study by the Insper’s Tax Research Center analyzed the proposals being discussed in the National Congress and found that the amounts vary from 2.2 million to 10 billion reais in assets","authorDate":"24/04/2023 15h19","author":"Bruno Toranzo","madeBy":"Por","tag":"tipos-de-conteudo:insper-conhecimento","title":"Bills regulating wealth tax diverge on what “wealth” should be","variant":"image"},{"jcr:title":"transparente - turquesa - vermelho"},{"themeName":"transparente - turquesa - vermelho"},{"containerType":"containerTwo"},{"jcr:title":"Grid Container Section","layout":"responsiveGrid"},{"text":"The Great Wealth Tax (IGF), foreseen by the Brazilian Constitution of 1988, but not yet instituted, has been frequently mentioned in the political-economic debate, especially in times of discussions about tax reform, as now. “There are several bills in the National Congress about this matter. But they can’t even define what a large fortune would be, that is, what would be the reference value that should be adopted,” says researcher Larissa Longo, from Insper’s Center for Research in Taxation.   “One of the PLs defends that assets starting from 2.2 million Reais could be understood as great fortunes and, therefore, suffer the incidence of the tax; another PL considers wealth only the assets above 10 billion Reais. If there is controversy even about this value, imagine the proposed design of the tax,” added the researcher, who presented a study on the subject during the  [Seminar on Taxation of Income and Wealth](https://www.youtube.com/watch?v=ZfDNimq6fRs) , on March 17. The event, held by the Center for Research in Taxation with the support of the Center for Management and Public Policy, debated various aspects of the rules for taxing income and wealth of individuals and companies in Brazil and in other countries.   The tax species is another factor that varies among the PLs – most, following the constitutional provision, propose the implementation of a tax, but there are proposals defining the compulsory loan as the modality of taxation of large fortunes, with the purpose, at the time of its proposition, of financing public policies related to the context of the pandemic. “In 2020, because of the fiscal and socioeconomic effects of the pandemic, the adoption of the IGF came to be considered a tax policy instrument to deal with the rise in public spending and the deepening of social inequality,” recalled Lorreine Messias, also a researcher at the Center. There is also controversy about the distribution of the tax revenue among the federative entities, even though no PL has made a calculation about how much would be collected.   In addition to analyzing these pending proposals, the Insper study looked at the international experience, looking at the few countries that tax large fortunes. “In the exercise we did, we identified two ways of taxing large fortunes: the  net wealth tax  and the  wealth tax on selected assets, ” said Professor Frederico Bastos, who also participated in the research prepared by Insper.   The first modality, also called net wealth tax, is levied on the difference between the assets belonging to the individual and his debts. In other words, debts are subtracted from the total value of assets to arrive at the amount that will be taxed. Colombia, Spain, Norway and Switzerland have adopted this form of taxation for large wealth.   The second modality, on the other hand, taxes the wealth of certain assets of the individual: financial and real estate, generally. “The idea here is not to worry about all the taxpayer’s wealth, but only about specific assets equivalent, for example, to our IPVA and IPTU,” said Bastos. Italy, France, Belgium and the Netherlands have opted for this way of taxing, with the Dutch practicing this taxation in one of the individual income tax brackets.   Daniel Zugman, a professor at Insper who was involved with the study, along with Larissa, Lorreine, Frederico, Leonardo Alvim, and Daniel Loria, pointed out that we cannot look at these countries without first understanding how the tax system is in each of them. “Norway, unlike Brazil, does not tax donations and inheritance. Switzerland taxes its citizens on a territorial basis, and not on a universal basis as Brazil does. This means that, there, the wealth tax does not affect those who have financial investments and companies outside the country. The professor also drew attention to the representativeness of the wealth tax in the total tax collection. In Spain, it represents only 0.45%, with a similar situation in Norway and Colombia. Only Switzerland is more representative, with a little over 4% of total tax revenues, although considering the wealth generated by the country, this percentage is not very significant either. The question Zugman asks is whether it wouldn’t be simpler, for example, to create other collection bands for income tax, considering, for this purpose, higher incomes than those already on the table.   Among the main conclusions of the Insper study are the negative incentives that can be generated by the taxation of wealth, such as the risk of capital flight and the discouraging of investment in the country; the difficulty in collecting the tax; and the low tax collection, with most countries presenting percentages lower than 1% of the total value.   Tax reform   During the seminar, the extraordinary secretary for Tax Reform and counselor at Insper’s Center for Management and Public Policy, Bernard Appy, said the Federal Government is working to draft a proposal for income tax reform that will be sent to Congress probably in the second half. “The challenge of a good tax system is how to make it fair – as progressive as possible – and favor the growth of the economy, while at the same time being efficient in terms of collection. In the case of income tax, there is significant international competition, with disputes over companies and even individuals. You are not isolated from the world when building the tax system. There is tax competition that needs to be considered in tax reform,” said Appy.   For Daniel Loria, director of the Extraordinary Secretariat for Tax Reform and a researcher at Insper’s Center for Research in Taxation, “the world is a world of competition for high-income taxpayers, for investments, for resources, requiring our attention to the design of the system so that there is attractiveness for this capital to come. From the perspective of economic efficiency, Loria highlighted the need for tax neutrality in the system as a whole, with taxes distorting economic activity as little as possible. “Economic agents should not be influenced by the form of taxation. If I have an option A and another B, taxation cannot be the factor that will determine my decision to allocate the resource. A taxation with rules and hang-ups interferes in this investment decision.”   The government’s goal is to carry out tax reform in two stages. In this first semester, the focus is on changing the taxes levied on consumption – one of these proposals was conceived by Appy. For this, according to the PECs (Proposals for Amendment to the Constitution) that are in Congress, the various taxes paid along the production chain will be unified in the VAT (Value Added Tax), with an estimated rate of 25% – necessary for the maintenance of the current Brazilian tax burden. In the second part of the year, it will be the turn of taxation on income and assets, with the reform of corporate and individual income tax. The possibility of a return to taxation on profits and dividends, which has been suspended in Brazil since 1995, is also being considered.   Within the OECD (Organization for Economic Cooperation and Development), the most common practice for taxation of profits and dividends involves conventional IRPJ (Corporate Income Tax) at lower rates; IRPF (Personal Income Tax) on dividends; and mechanisms for relief from double taxation, such as deductions from the tax base, appropriation of credits (compensation for tax already collected) or special rates. Brazil, as well as Estonia and Latvia, fully exempts distributed dividends. “When dividends are taxed, there is an incentive for withholding and reinvestment, not for distribution,” says Rodrigo Orair, director of the Extraordinary Secretariat for Tax Reform.   “The most important effect of the consumption tax reform is the increase in economic growth potential, which raises the income of the poorest and, above all, government revenues, which, if well spent, positively impact income distribution,” explained Appy. “The taxation of income and wealth, on the other hand, has clearer distributive purposes, with the insertion of progressivity in the tax system. Good taxation is that in which people with equivalent income are taxed equally and that, the higher the income, the higher the tax rate on it. Brazil has distortions that run away from this parameter,” he added.   Finally, Vanessa Canado, professor at Insper and coordinator of the Center for Research in Taxation, said that only the cost of compliance justifies a difference in tax treatment given to smaller companies compared to medium-sized and larger ones. “The government’s investment in technology and simplification in fulfilling accessory obligations means that these smaller companies no longer have a high compliance cost, and can thus be on a level playing field with all the others,” she observed. For her, taxation based on sales, despite the ease of calculation, is not the best way. In this model, companies with the same profit can be taxed differently, depending on their turnover. “Companies with equal profits need to pay equal corporate income tax. Currently, the one that invoices more, having the same profit as the other one that invoices less, contributes more because taxation is levied on sales”, he said."}]