President Dilma Rousseff the Malfeasant Slayer, yes, but Tax-Cutter?

Six Ministers got the axe during President Dilma Rousseff’s first year in office, but that’s not all she cut. Rousseff has also pruned some small but significant taxes, improving the climate for business. Brazil’s economic vigor was on display in 2011. The Folha de São Paulo reports today that imports and exports broke all previous records, and it is little surprise that Brazil became the sixth largest economy in the world, overtaking the U.K. Add to these economic feats a package of transparency measures that should improve government efficiency, and Brazil may just have what it takes to make it through a looming world recession relatively unscathed.

 Tax Cuts

With record receipts and a record tax burden, it was about time Brazil’s government cut-back on taxes. The ‘Brazil Maior’ (Bigger Brazil) plan, adopted in August of 2011, provided immediate tax reimbursements for purchases of ‘industrial equipment.’ This initiative may lead to a jump in the country’s stock of capital goods and, in turn, its productive capacity.

In December, the government also gave consumers a boost. The financial operations tax was cut from 3 percent to 2.5 percent in an effort to save consumers money on credit operations. The Tax on Industrialized Goods (IPI) fell for domestic kitchen appliances: for fridges it went from 15 to 5 percent, and on dishwashing machines it fell from 20 to 10 percent, to name just a few examples.

Finally, the Brazilian government also gave some pep to domestic industry. It is now giving exporters a 3 percent credit to compensate for taxes paid on goods prior to exporting. The government has also eliminated a 6 percent tax on financial operations for foreign investors who put their money into the infrastructure sector. As an excellent article by Valor Económico sums up, there are many other little tax breaks on individual items and sectors.

Lower Tax Burden?

Does the cost associated with administrating all these different taxes and tax changes in all these different sectors offset the net amount of taxpayer savings…? Overall the net take of government may not have diminished much this year after all.

Government raised taxes significantly in some areas. On cars imported from countries other than Mexico, Uruguay, and Argentina, the Tax on Industrial Goods (IPI) was raised by 30 percent – a major blow to consumers and car importers. In March of 2011, the government also elevated the tax on credit card use outside the country, from 2.38 percent to 6.38 percent.

More Progressive Tax Policy?

All in all, tax policy in 2011 appears to suggest that richer consumers will pay more – those who buy imported cars and spend money abroad – while regular consumers –those buying domestic appliances and using credit domestically – will save a little money. The Rousseff administration also appears to boost domestic industry by helping exporters, boosting incentives to buy capital goods, and further protecting the national automobile industry. Whether these domestic initiatives will amount to real value for Brazilians is worth watching.

It will be even more interesting to see whether some non-financial measures will create greater efficiencies in Brazil. Will transparency measures that form part of Brazil’s commitment to the Open Government Partnership, including the country’s newly passed freedom of information law, help diminish the tax burden — already the highest in the Americas at close to 35 percent of GDP? The hope is that lower taxes result from waste and incompetence revealed, and that procurement and regulatory processes become fairer and more competitive, giving taxpayers greater value.

Now if the government and the court system would only do something to address impunity. According to investigations by the Folha de São Paulo, not one of the six Ministers dismissed from their posts this year on allegations of corruption have been punished. More on that later.