Why Brazil struggles to tax the super-rich

The government of President Lula is trying to simplify Brazil’s anachronistic tax system and make it more progressive. But can this attempt to change the highly unequal country’s tax laws succeed where three decades of previous attempts have failed?

Brazil’s extreme inequality, which would be a cause of shame in any civilized country, is seemingly a source of pride for many politicians here. What matters for those at the top and those who dream of being there, is not reducing the gap but instead glamorizing it – so that individuals cease to want collective social justice and seek only their own place in the sun.

Nonsensical arguments for taxing the super-rich less are circulated (often by groups supporting former president Jair Bolsonaro) on social media, claiming the rich cannot be taxed because they create jobs, work harder or have been elected by God.

In the face of this, the first reform law to simplify consumption taxes was approved by the Chamber of Deputies in July and is now being discussed by the Federal Senate. It does away with five federal, state and municipal taxes and creates a VAT (Value Added Tax) levied on sales of goods and services in their place.

This part of the reform has wide support, particularly from the manufacturing industry, and should be approved later this year. However, the second part of Lula’s reforms, aimed at reducing social inequality through tax justice, is likely to be more difficult to pass.

In Brazil, the income of the super-rich is taxed less, proportionately, than that of the poor and the middle class. Company dividends are exempt from levies, while the wealthy are also able to use ‘exclusive funds’, aka ‘super-rich’ funds, which end up being tax havens within the country. In addition to reinstating dividend taxes and tightening the rules for these funds, there are other proposals: for example, adjusting income tax rates to exempt most of the middle classes, who currently pay 27.5 per cent, and creating 30 and 40 per cent rates for high earners.

Another change is related to inheritance tax, which currently has a top rate of eight per cent and is not even applied in some Brazilian states. By comparison, inheritance tax rates can reach 55 per cent in Japan, 50 per cent in Germany, and 40 per cent in the US and UK.

Meanwhile income inequality is increasing, too: average wages paid to Brazilian workers fell by 6.9 per cent in 2022, while company shareholders made 23.8 per cent more than they did in the previous year, according to Oxfam. The NGO found that Brazilian shareholders received $34 billion – almost the same as the real terms wage cuts faced by the country’s workers.

Fairer taxes could help reverse this trend: taxing the super-rich could provide about $58 billion annually, according to associations representing tax agency workers.

The big problem here is that a significant number of deputies and senators – many themselves obscenely wealthy – represent the interests of the mega-rich in Congress. How to get them to vote against themselves, and the interests that elected and keep them in power, is the billion-dollar question.