University of São Paulo: Income transfer programs reduce inequalities, but taxes cancel out the benefit

To redistribute income, the Brazilian State adopts some strategies such as Social Security and social assistance and other types of assistance. The history of these policies throughout the 21st century, as well as their positive and negative impacts, are the subject of a study by the Research Center on Macroeconomics of Inequalities (Made) of the Faculty of Economics, Administration and Accounting (FEA) at USP.

To provide an overview of income redistribution, Theo Ribas Palomo, a researcher at Made and one of the authors of the article, explains that the initial income, the income that individuals earn in the labor market, has changed little over time. “In all these 20 years, Brazilian inequality in the labor market remains very high and relatively constant,” he tells Jornal da USP in Ar 1st Edition .

According to Palomo, income transfer programs such as Bolsa Família played a central role in reducing inequalities. On the other hand, direct taxes, which are levied on income and assets, such as the Tax on Motor Vehicle Ownership (IPVA), had practically no impact.

“Wealth inequality is much greater than income inequality”, explains the researcher. “When we have taxes that tax wealth and do not reduce inequality, it means that there is a big problem in the design of these taxes”, he adds.

Indirect taxes, which are levied on consumption, affect mainly the poorest families. The final balance is negative, as the few benefits of direct taxes do not balance the losses of indirect taxes. “Brazilian taxation manages to increase inequality that is already very high and alarming,” says Palomo.

Tax reform
According to the researcher, a tax reform needs to be thought of in the broad sense, of “what are the consequences of each measure and each point of the reform on income inequality in the country”.

This scenario, according to Palomo, can be changed by the progressive increase in the weight of direct taxes. One possibility, for example, is to increase the incidence of income tax on the richest layer of society, which, with maneuvers and exemptions, pays a lower rate than the rest of the population. It is also necessary to focus on a reform of indirect taxation to “reduce the burden of these taxes on the poorest population”.

In the context of income transfer programs, the researcher says that there is room for improvement. He regrets the extinction of the Bolsa Família program, which, according to him, was very well designed, despite not being such a great source of income for the poorest families.

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