University of São Paulo: Tax Justice Typically Not a Driving Force for Income Tax Reforms

In his study , Nikolas Schiozer, researcher at the Center for Research in Macroeconomics of Inequalities (MADE), at the Faculty of Economics, Administration, Accounting and Actuarial Science (FEA) at USP, addresses the changes in Personal Income Tax throughout history Brazilian. The objective was to analyze the reasons that motivated these changes, according to the official discourse, with a specific focus on understanding the space that the motivation for tax justice, that is, the reduction of social inequality, had in the justifications.

There were 111 legislative proposals that proposed changes between 1922, when the tax began, and 2021. The reasons for changes to the Income Tax are diverse and serve different purposes. “We can decide to increase the tax burden on cigarettes, for example, to discourage the consumption of this type of good. Or we can create certain taxes to address certain economic or social problems, as in the case of income inequality”, explains the researcher.

The research delimited six large groups of justifications, namely revenue, countercyclical (crisis combat), inflation, economic growth (benefit or disincentive to economic activity), simplification and tax justice. The most common was the reason for economic growth, appearing 28% of the time. Changes that mentioned the interest of reducing inequalities were only the fourth most mentioned, appearing in 15% of the proposals.

The role of tax justice

The work ends up revealing that the intention to reduce inequality was not a central justification in history. Most of the changes based on the progressiveness of the rate, which makes higher incomes pay more percentage tax than lower incomes, actually happened for another reason. “We observe that the measures that most increased the progressiveness of the system tend to be those that occurred during periods of crisis, because it is during these periods that the government seeks to increase the revenue base”, comments Schiozer.

The period in which tax progressivity was motivated by social justice occurred during the military dictatorship. The economist’s hypothesis was that, due to pressure for increased inequality, the government sought to respond to criticism through changes in Income Tax.

Recently, however, this issue has been left aside. The researcher states that “since redemocratization we have practically not observed policies that sought to change Income Tax to increase the system’s progressivity”.

Schiozer finally comments that we have reached a level of maturity to propose new changes based on these reasons. He comments that “today’s system is very much based on what was created in 1995. Since then, the system has changed a lot with the end of inflation, but since then little has changed [in Income Tax], so we have Today the system is very regressive.”