The very rich few pay much less tax than the very poor, in proportion to their income, but this is not news to anyone. Perhaps what needs to be clarified is that one of the factors that determine this injustice in the tax system is the fact that profits and dividends distributed by companies to their partners and shareholders are exempt from income tax, even when remitted abroad.
Thus, people are not treated equally and will be taxed more or less depending on the origin of their income, whether from work or capital. We also know that most of the income of the richest people in the country is made up of profits and dividends, so this group ends up paying less tax than those who live on their salaries.
When we analyzed the data from the Income Tax returns, we noticed that the effective rates of those who earn more than 320 minimum wages are very low and are very close to the effective rates of those who earn up to 5 minimum wages, with the difference that the the effective rates of the richest have been decreasing year by year, in the last 10 years, and those of the poorer are increasing. In other words, the Income Tax is helping the rich to become richer and the poor to become poorer.
Supporters of this taxation model often claim that distributed profits should be exempt because they have already been taxed in companies. However, this argument does not apply to any other country in the world, since all, except Brazil and Estonia, tax both corporate profits and profits and dividends distributed to partners and shareholders, as they consider them to be distinct and autonomous persons. The company is not to be confused with the individuals of its partners and this autonomy of identities between the companies and their partners was created so that the equity of the partners is not compromised with the debts of the companies, according to the understanding enshrined in the entity’s accounting principle.
On the other hand, the fact that a person’s income has been taxed does not prevent it from being taxed again when that income is transferred to another person, and this is what normally happens in economic circulation. The worker spends his income on the consumption of goods and services and thus wages, which were taxed at source, end up being transformed into taxable income in the hands of other taxpayers.
Others say that in order to tax profits and dividends we would have to reduce the taxation of legal entities, otherwise we would be discouraging investments. Here are some clarifications. The argument that companies are heavily taxed in Brazil is fallacious. Firstly, it is necessary to remember that most of the collection is made up of indirect taxes, and this is also a factor of injustice, as these taxes weigh much more for the poorest than for the rich. Indirect taxes are transferred to the prices of products and services, which, therefore, are resources that only pass through companies.
Even the Corporate Income Tax (IRPJ) and the Social Contribution on Net Income (CSLL) for more than 95% of companies are levied on a portion of revenue, therefore, these taxes too end up being transferred to the prices of products sold. Indirect taxes are paid by consumers or service users, and companies are only responsible for collecting them.
Only 3% of companies in Brazil calculate IRPJ and CSLL on the result of their economic activity. For these companies, if we add the IRPJ and CSLL rates together, the applicable nominal rate would be 34% of profit. The financial sector would be subject to a higher rate of CSLL, totaling a nominal rate of 45%. Although they seem high, we will see below that the rate effectively paid by companies is much lower than that.
Analyzing the financial statements of the 100 largest business groups in Brazil, from different economic sectors, the researcher Paulo Henrique Pegas, showed that the average effective tax rate of these companies was only 21%, between 2010 and 2019. The ten largest banks, in this same period, paid only 14.3% tax on their net income. This difference between the nominal rate and the effective rate is due to the application of a series of instruments that have been created over time in Brazilian legislation, including the deduction of interest on equity, accelerated depreciation and compensation for losses , among others, which make the tax calculation basis much lower than the corporate income for the period.
Therefore, the argument that the return of taxation of distributed profits and dividends would make the taxation of economic activity very high and discourage investments is also unfounded. It would be more reasonable to suppose that the return of taxation of the distribution of profits would promote an increase in the capitalization of companies, resulting from a greater retention of profits in the activity itself.
The low taxation of high-income individuals combined with a reduced effective taxation of legal entities makes, in comparison with OECD countries, one of the countries with the lowest share of taxation on income, profit and capital gains. On average, the collection of these taxes in those countries represents 11.4% of GDP and in the Brazil is no more than 7.3%.
The non-taxation of distributed profits and dividends, instituted in 1995 by Law 9,249, meant a clear political option for the exemption of high incomes, benefiting the richest sectors of society, under the most diverse pretexts. In relation to profits remitted abroad, it created an unjustifiable asymmetry between countries, since such income, not taxed here, ends up being fully taxed in the countries of destination, that is, we abdicate taxes in favor of other countries. Brazil is a signatory to numerous International Agreements Against Double Taxation, which means that income that has been taxed at source is not taxed at destination, except to complement the difference in rates between the two countries.
On the other hand, in 1995 a period of freezing or near-freezing of the Individual Income Tax table also began, producing a lag that now exceeds 130%. This caused a shift in the incidence of the tax to increasingly lower incomes, in such a way that those who receive less than 2 minimum wages today are already in the field of incidence of the tax, while, in 1995, taxpayers with income of up to 8 minimum wages minimums were exempt. This explains the increase in the number of taxpayers required to fill in an adjustment statement each year. Although we recorded a drop in the salary mass in 2021, we had an increase of more than 2 million taxpayers required to declare in 2022. There were 36.3 million declarations delivered, against 34.1 million in 2021.
Tax choices are always political choices. If at some point Brazil decided to stop taxing the richest, it could perfectly well return to taxing them. The revocation of the exemption from distributed profits and dividends does not solve all the country’s tax problems, but it is, without a doubt, an essential step that needs to be taken, without which it is practically impossible to advance in the construction of a socially fairer tax system and equitable.
Read more texts from the column of Dao Real Pereira dos Santos do Brasil de Fato RS
* This is an opinion article. The author’s view does not necessarily express the newspaper’s editorial line Brazil de facto.
Editing: Katia Marko
