The Reform Game

A special congressional committee looking into tax reform released a draft report, which simplifies things down to a single, value-added type of tax. The Cardoso administration, however, seems to be against tax reform despite all its rhetoric to the contrary.

Adhemar Altieri

Recent events offered more than just a glimpse at how short-term concerns continue to get in the way of sustained, concrete progress in Brazil. The issue—a major, ongoing debate—was tax reform. The twist this time, is that Congress seemed to want to do the right thing, while the government offered resistance for the wrong reasons.

At least since the start of Fernando Henrique Cardoso's first term in 1994, anyone who follows Brazilian affairs has been hearing about the importance of concluding major reforms—tax, social security, political, judiciary among others. The government, and especially Congress, have often been criticized for the irritatingly slow pace of progress, given the political and economic importance of reforms to the overall picture in Brazil.

Tax reform has always been considered one of the most difficult to conclude, because of its complexity. While congressional inaction has been a problem, the executive branch has also taken some heat for appearing less than interested in pushing ahead. More than that, the Executive was expected to take a leading role in the tax reform debate, but has gone nowhere near that level of involvement.

As several critics have put it, there's little chance of a serious, sweeping tax reform being conducted almost strictly by the Legislative. Because such reforms affect an entire country, a leading role by the Executive is a must, in part to keep regional interests from taking over the discussion. In Brazil however, the Executive—and the President himself—have been on the sidelines for the most part, always declaring themselves in favor of tax reform, but doing little, if anything, to contribute or speed along the process.

Pressure, especially from business and industrial sectors suffocated by a myriad of taxes, fees, deductions and contributions, finally forced the hand of a special congressional committee looking into tax reform. It released a draft report, which among other things eliminates much of the current tax tangle and simplifies things down to a single, value-added type of tax. Precisely what everyone wants tax reform to do: simplify.

The government's reaction, however, exposed what's behind its "we're all for tax reform" speech of the past few years. Top officials, including finance minister Pedro Malan, did their best to discredit the draft report, describing it as "filled with structural and operational problems", enough to "seriously compromise the national taxation system".

Suddenly, here was the government trying to shoot down a draft report that's still open to discussion and amendments before going to a final vote. That, to many observers, let the cat out of the bag: it's not that the government is indifferent, or disinterested... it seems to be, really, against tax reform.

Like any draft report, this one surely has its flaws. But there were also a number of positive points in the document, and it was as if the government wasn't prepared to even consider them. The idea of working with committee members to make changes, and improve the report through amendments, appeared to not even be an option at first.

A major sticking point for the government was a proposal to create a two-tier value added-type of tax, to be collected by the federal as well as state administrations. The government rejected this formula outright, saying the tax should be collected only at the federal level, with funds then redistributed to the states.

This particular aspect of the reform seems to be the key. States are not prepared to give up collecting part of the tax themselves, but the government sees a single federal tax as a way to end what has been dubbed a "fiscal war" between Brazilian states: incentives, especially tax waivers, offered to attract new investments. Without controlling part of the tax collection, states will have nothing to waive, and the "war", which many feel has detrimental effects overall for Brazil, would end.

Even this shouldn't be so difficult an obstacle to overcome. In its only attempt to put together a tax reform proposal, back in 1995, the government itself suggested a two-tier system for a new value-added tax. So it is now rejecting what it proposed years ago. Secondly, there's nothing really innovative here—this is what already happens in several countries, where a federal tax is collected, and state or provincial administrations collect their own sales tax.

Why so much resistance then, to a point where several sectors have come out accusing the government of being, quite simply, against tax reform? Here's a solid clue from Abram Szajman, president of the powerful São Paulo State Federation of Commerce: "The Executive is not interested (in tax reform) because, in the past few months, they've broken all records for revenue collection".

Opposition (PT, Partido dos Trabalhadores—Workers' Party) congressman José Genoíno shares that view, and explains that because taxes were raised to allow Brazil to meet fiscal adjustment targets agreed to with the IMF earlier this year, revenue collection has shot up. "In the six and a half years that Cardoso has been in power, the tax bill in Brazil has been raised from 25 to 32 percent", he concluded.

The government is now busy trying to look outraged at suggestions that a tax reform was never in the cards to begin with. If anything, the criticism worked to force the feds to get more involved with tax reform than ever before: a new work group has been formed to revise the draft report, and come up with solutions for the sticking points identified so far. The group includes representatives from Congress, the Executive, and state governments

Whether this will change anything is an open question. Right now, the perception is that the government would really like to leave things the way they are, so as not to affect revenue collection, which is going quite well thanks to tax hikes introduced this year. In other words, instead of working to reform a totally inadequate, costly, cumbersome and unfair system—a campaign promise now almost six years old, the government appears to be working to pass that task along to the next occupants of the Alvorada Palace in Brasília.

Adhemar Altieri is a veteran with major news outlets in Brazil, Canada and the United States. He holds a Master's Degree in Journalism from Northwestern University in Evanston, Illinois, and spent ten years with CBS News reporting from Canada and Brazil. Altieri is a member of the Virtual Intelligence Community, formed by The Greenfield Consulting Group to identify future trends for Latin America. He is also the editor of InfoBrazil (http://www.infobrazil.com), an English-language weekly e-zine with analysis and opinions on Brazilian politics and economy. You can reach the author at editors@infobrazil.com

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