Brazil’s Stock Market Soar As New Economy Minister Vows To Slash Taxes

; posted on
January 8th, 2019

Brazil’s stock market rallied after the new economy minister, Paulo Guedes, vowed to drastically lower the country’s tax burden and reform its generous social security system, but whether those pledges will become reality remains to be seen. 

Reduction of Taxes

In a speech in Brasilia on 2 January, Paulo Guedes said he would concentrate on reform of the state pension system, privatization of government-owned enterprises, and the simplification and reduction or elimination of taxes. The economy needs “more Brazil, and fewer Brasíliá, with an economic opening,” Guedes said.

Related to tax, Guedes said he planned to cut Brazil's tax burden to 20 percent of gross domestic product from 36 percent, free the credit market from overcrowding by state banks, and reduce protectionism. Furthermore, he has come out in favor of setting the general corporate tax rate at 15 percent, down from 34 percent currently. The top marginal rate for individual taxpayers would be reduced from 27.5 percent to 25 percent for the highest earners, with rates of 15 percent to 20 percent for everyone else.

The reduction of taxes would necessarily be accompanied by the reduction or elimination of various deductions and fiscal benefits, including the currently allowed deduction of some expenses in the calculation basis of the income tax for individuals, [such as] education and health, in order to compensate losses in tax revenue, and the reinstatement of the charge on dividends, currently exempted.

Unifying the Federal Tax

Besides the tax reduction, the Ministry of Economy also has talked to shrink federal tax by unifying seven or eight taxes into one federal tax to be known as the unified federal tax. Among the candidates for consolidation are the tax on manufactured products (IPI), the tax on financial transactions (IOF), the Program of Social Integration contribution (PIS) and the Contribution for the Financing of Social Security (COFINS).

Moreover, Bolsonaro and Guedes have vowed to simplify Brazil’s byzantine tax code by combining a mishmash of federal and state consumption taxes into a single levy similar to a VAT.

As the planning on tax reduction and unification of federal tax require a constitutional amendment, the new government will have to garner support from at least three-fifths of the National Congress. For the time being, it is not safe to say whether the new president will have this basis of support since negotiations are still in progress.

Sources: Reuters, Bloomberg

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