Published at Brazil in Focus: Brazil needs a Tax Break

See the article, published on 12 April,  Brazil in Focus

During a recent gathering of industrial leaders in Rio de Janeiro, Eliezer Batista da Silva mused that Brazil has the “taxes of Sweden and the services of Angola.” It’s an old saw, but it gained an extra bite in the mouth of Batista, a founder of the multinational mining conglomerate Vale and the father of Brazil’s richest man, energy mogul Eike Batista.

While the elder Batista’s jab may sound like hyperbole, the comment fell on sympathetic ears at Rio’s Industrial Federation, FIRJAN. Tax reform is the business community’s top priority. And if anyone doubted the point, FIRJAN launched an aggressive television and media campaign – the big tax diet – in the run up to the 2010 elections.

The case for reform is well taken. Brazil has the highest tax-to-GDP rate in the western hemisphere, over 35 percent. Worse, Brazilian taxes are so numerous and their codes so complicated that experts say the system encourages informality (hence, tax evasion), discourages innovation, and retards Brazil’s development beyond commodity-based production. There has been no scarcity of proposals to fix the tax system over the years, but most have run into political roadblocks. The principal problem is resistance from federal, state, and municipal governments fearful that any reform, one way or another, will cost them tax receipts.

If the business community wants to make a compelling case for tax reform, the first step should be to shine a light on how government could be saving or allocating resources more efficiently— how they could be doing better with less.

It’s not a difficult case to make. On March 30th 2011, O Globo’s lead opinion piece reviewed a 2003 report by the Comptroller General on federal funds misappropriated by malfeasant municipal government officials— approximately $60 billion Reais worth, about the size of Uruguay’s GDP.

The key challenge for the business community, the media, and public policy advocates is to better monitor government spending and due process. Government auditors are insufficient for the task at hand; the scope of the problem is too large and using auditors for enforcement is expensive.

The media and citizens need to lead, but greater public sector transparency is a key precondition for effective monitoring. To this end, Brazil has an important tool in its hand, the sort that insiders call comprehensive transparency infrastructure and what everyone else knows generically as a public information law (PL 41/2010) Introduced by Dilma Rousseff in 2010, when she served as Chief of Staff to former president Luiz Inácio Lula da Silva, the law passed the Chamber of Deputies in April 2010 and only awaits sanction in the Senate.

The law not only provides obligations for the Brazilian government to ‘proactively’ publish information about spending and regulation, but it also mandates that governments disclose copies of most primary documents upon request. This is key because greater transparency means better government.  Ever aware that society may be looking over their shoulder, public sector officials are driven to do their jobs in a more organized, efficient and accountable manner.

In the U.S. and Canada, businesses are the most frequent users of access to information laws, accounting for about 40 to 60 percent of all requests, with media, policy specialists, and citizens making up the remainder. These countries passed freedom of information laws in 1966 and 1983, respectively.

It is time for Brazil to join the vibrant global movement towards openness. Freedom of information is a fundamental human right enjoyed by more than 5 billion citizens in more than 90 countries. Half of these countries have enacted laws within the last decade, including 12 Latin American nations, the latest of which was El Salvador on March 3^rd.

Some countries have already moved on to a new stage of openness, providing citizens with aggregate open-format datasets. Examples include the U.S.’ http://data.gov and the U.K.’s http://data.gov.uk. The proposed law now in the Brazilian Senate, 41/2010, includes a similarly modern provision for releasing open-format data.

The main obstacle to the passage of the law is not, apparently, the fear of exposing corruption, inefficiency, and incompetence, but those parts of government worried about exposing what occurred during the 1964-85 dictatorship. Certainly, the law 41/2010 prohibits information from being withheld if it is pertinent to the investigation of human rights abuses. But this is first-and-foremost a law designed for use by everyday citizens. It honors the right-to-information of Brazil’s citizens as stipulated in the constitution of 1988, articles 5 and 37.

If Brazil is to achieve good government, never mind saner taxes or a meaningful public sector reform, business leaders and citizens first needs to draw attention to spending, waste, and misplaced funds. Only by building laws that guarantee the free and unfettered access to information can an emerging society as important as Brazil’s monitor and enforce the efficient – and democratic – allocation of resources.