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  • Marcos Cintra

Livro: Bank transactions: pathway to the single tax ideal - A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007) (III/III)





The issue of bank transaction taxes still rarely appears in specialized literature. Brazil currently enjoys primacy in this area, seasoned by the richest, most comprehensive, and most successful field experimentation ever undertaken in this unique taxation technique.

We cannot turn anywhere for help on this subject, in English, French, German, Japanese, or Italian. This time, the only reference we have is our own experience, which also serves as the fundamental benchmark for research by foreign scholars.

The pioneering theoretical work of Professor Marcos Cintra, on the “Single Tax” on bank transactions, has resulted in fruitful political engagement that has ripened into a succession of specific propositions, the culmination of which is the legislative proposal that bears the name of Federal Single Tax. A Special Committee in the Chamber of Deputies was formed to analyze this constitutional amendment bill.

Alongside this proposal, a bank transaction tax became a reality, though it escaped the control of its sponsor. This tax took the form of the IPMF [Provisional Tax on Bank Transactions], which was later resurrected as the CPMF [Provisional

Contribution on Bank Transactions]. This tax provides an excellent laboratory experience, repeatedly proving groundless most preconceived notions that oppose it. It also defined an administrative doctrine within Brazil’s Federal Revenue that has been surprisingly favorable to the merits of this tax.

This text presents some modest preliminary comments that might be useful to better understand the proposal. These comments are not a substitute for the benefits to be gained by reading the generous and seductive “justification” attached to the text of PEC No. 474/01 [Constitutional Amendment], nor to the writings of the eminent Professor and Deputy Marcos Cintra.

The specific legislative task is the redefinition of some of the constitutional guidelines on tax policy. The core issue is the adoption of non-financial bank transactions as the predominant federal tax base – as a solution to the impasse in tax reform.

This text is not a package of regulatory suggestions, which would require the cooperation of the executive branch. Neither is it a compendium of numerical simulations or a scholarly evaluation about presumed macro and microeconomic effects of a bank transactions tax, which a few university dissertations already address.

These are pragmatic considerations, qualitative and multi-focused reflections that seek to engage debate on the various and complex dimensions of the issue, which include reflections on the less common perspectives of social psychology, financial sociology, institutional administrative analysis and, of course, legislative technique.


Changes within Brazil’s society and economy since the last celebrated tax reform, in 1965, have created an accumulation of distortions within our tax system. Several attempts at reform have ended in failure, including the “Sayad Commission” in 1986, followed by the “Ary Oswaldo Commission” (both were commissions of the executive branch), and the constitutional revision convention of 1993/1994 (a frustrated attempt by the legislative branch).

Official tax policy during the last presidential terms, pressed by the demands of economic stabilization and by the limitations imposed by external constraints, has emphasized revenue productivity and reliability, to the detriment of rationality within the tax system. Preference has been given to investing in easily collectable taxes, which overburden a given set of taxpayers and postpone the solution to everincreasing distortions and inequities in the tax system.

The Union’s cumulative contributions, because they are not shared with other entities of the federation [states and municipalities], have grown during this period. Income tax has shrunk in order to meet expectations of foreign investors and large taxpayers, resulting in overwhelming taxation, almost exclusively, of the upper strata of the working middle class.

During the last fifteen years, when several attempts at reforming the tax system were tried, it was tacitly agreed that demands for tax reform were to be centered on consumption taxes. The government invested in a unified value-added tax program without conviction. Even the Secretary of the Federal Revenue has admitted, years later, that he does not consider this tax to be practicable in the foreseeable future.

A perception that had been blurred in the past now became clear: that our peculiar federal system cannot handle a VAT. It also became clear that, although the VAT may satisfy large industry and trade, it harms the service sector and huge numbers of small entrepreneurs.

PEC No. 175/95 (one of the government’s many tax reform proposals), after producing a lot of heat and little light, is now buried. By 2001/2, the only thing it accomplished was to give birth to a modest by-product: a non-cumulative, restricted, experimental, and time-scaled bill for the PIS/PASEP, which was in the interest of large taxpayers and export business owners.

In the meantime, tax burden grew by 4 percentage points, between 1994 and 2001, and the tax revenue administered by the Federal Revenue showed a real growth of 54%. Most significantly, inequity in tax incidence increased, which should make tax reform a priority in terms of public discussion.

The most crucial challenges to Brazil’s public administration are: a) the necessary reduction of the overall tax burden (which, however, as a precondition, must redistribute tax costs more equitably across a much broader taxpaying universe), and b) a more rational fiscal policy in order to exonerate labor and production costs, and to stimulate economic growth.

According to an academic study undertaken at the University of São Paulo (FIPE/USP) for the Industrial Federation of the State of São Paulo (Fiesp), the focus on consumption taxes as a priority in tax reform is misguided. In order to correct tax imbalances, the predominance of consumption taxes in Brazil should be inverted in favor of income and property taxes, bringing our system into harmony with models used throughout most of the developed world, that is, a model which taxes consumption lightly, with income tax providing the bulk of public revenue. It is likely that Brazilian industry and exporters would more easily accept taxing consumption if it were more lightly applied, and if income and property taxes were predominant, as it is in the United States, England, Japan, the Scandinavian countries, and others.

Other analysts, such as the staff of BNDES [National Economic and Social Development Bank] and IPEA [Institute for Applied Economics Research], understand that a developing country, with its significant income and wealth inequalities – as is the case in Brazil – can only rely on indirect taxation, while at the same time seeking to apply it in the least distortionary possible manner.

Concerning this last suggestion (but contrary to the IPEA’s theoretical postulations that favor value-added taxation), the Federal Revenue has published a series of empirical studies on its website. These studies suggest that the effect of cumulative taxes, such as the CPMF and the PIS/Cofins, are not regressive, as had been thought, but rather seem uniformly proportional at all levels of purchasing power, closely approximating the effect expected by an ideal VAT, scoring better than the ICMS [Tax on the Circulation of Goods and Transportation and Communication Services] or IPI [Tax on Industrialized Products] with their selectivity and their value-added technique.

It is suggested that taxes that are apparently unsophisticated and insensitive to individual differences, such as taxes on gross income and bank transactions – which are simple, moderate, and less prone to evasion – ultimately engender economic effects that are less distortionary than those of sophisticated net income or valueadded taxes with high rates, which are very complicated, heterogeneous, and easy to evade.

Recent studies done by Federal Revenue on the experience with the CPMF (a bank transactions tax), confirm the theoretical simulations and observations on which Professor Marcos Cintra has been insisting for some time, claiming that regressiveness of such cumulative taxes is illusory.

So many years of failures and hugely disappointed efforts attest to the exhaustion of our traditional tax reform paradigms.

It does not seem that unifying consumption taxes into an all inclusive valueadded tax would be practicable over the medium term, given the conflicts within our federal structure and the dependence of Brazilian states on the current ICMS. Nor can the federal government, risk losing part of the revenue it collects with its gross income taxes.

The challenges that remain are finding ways to ease tax pressure through more equitable tax incidence, preventing tax avoidance, and including the informal economy, without seeking an unrealistic solution that would result in significant growth of the tax collection and auditing apparatus.

In view of these difficulties, taxation of bank transactions appears to be a plausible pathway to tax reform. Bank transactions, as a tax base, would differ little from consumption and gross income, which are Brazil’s current predominant tax bases. A bank transaction tax would offer advantages in that it costs little, is simple, light, has universal scope, and is difficult to evade.


There is no perfect tax. The choice of a tax system, considering the clashing interests of groups and sectors that comprise a complex society, should seek to cause the least harm to the majority, given that it will be incapable of completely satisfying everyone.

The failure of tax reform is not due merely to a lack of government determination as many have claimed. The apparent indecision and disorientation of the government, which is wrongly interpreted as lack of effort, reflects disagreements within society, with no immediate prospect of solution.

The problem is that the tax systems we envy in more developed countries where, contrary to Brazil’s situation, income is taxed more heavily and consumption and property, more moderately, rest on the sociological presupposition of solid democracies, of high per capita income, of vast middle classes that are educated, politically aware, and capable of exerting broad social control over the actions of well-equipped fiscal administrations.

Still valid today is the diagnosis put forth by Cambridge scholar Nicholas Kaldor (Colloque International sur la Fiscalité et le Dévellopement, Paris, 1982). He wrote that Latin American tax reforms would continue to be cosmetic arrangements condemned to failure, so long as the dominant elite in that part of the world remained unwilling to adopt a more patriotic posture, keeping their fortunes within their own countries and participating more substantively in the taxpaying effort, as has occurred in Western Europe in the past half-century.

But it is unrealistic to expect the dominant elite in societies that are profoundly unequal to renounce their power to manipulate the tax system to their own benefit, and to become spontaneously willing to make tax sacrifices. Patriotism of the sort Sir Kaldor alludes to is increasingly becoming a forgotten value within the context of today’s globalized economy.

Mass society will no longer acquiesce to a tax, the payment of which was once a conscious act of ritual compliance with the Social Contract. Today, preference for “anesthetic taxes” prevails. Common sense, therefore, recommends construction of indirect and automatic formulae that tax everyone proportionally, without exception, preferably without appeal to values and to ethical conscience. Bank transactions are a tax base capable of facing this challenge.

Direct taxes, charged against income and personal wealth, are in theory both fairer and more sensitive to the diversity of individual circumstances. But this theoretical advantage becomes lost in practical problems. Brazil’s experience with personal income tax highlights distortions that are both acute and nearly insurmountable. The late Professor Henry Tilbery, an exceptional tax attorney, expressed his opposition to implementation of a tax on wealth in Brazil, explaining that, though he favored the fair theoretical configuration of the tax, he believed execution would be inequitable; that, with preference given to ease, tax pressure would increase on reliable taxpayers, but would still fail to reach habitual tax avoiders.

The tax base provided by bank transactions is more democratic than income and personal wealth tax bases. It has more effectiveness, and on a broader scale. Professor Maria da Conceição Tavares well understood this feature and did not mince words in acknowledging this fact.

During the first half of the 1990s, Professor Marcos Cintra’s theoretical findings resulted in the Single Tax Bill, which became a plank in the platform of Flávio Rocha’s presidential campaign. It gained support, in some constitutional revision proposals, to anchor the tax system on a bank transactions tax, particularly the proposals by Deputies Roberto Campos and Luis Roberto Ponte.

Since then, while the congressional forum has argued in vain for several years over the impracticable implementation of a unified VAT for our federated republic, Deputy Marcos Cintra has further developed several formulas for harnessing a bank transactions tax.

The first formula, amendment No. 47/99 to PEC No. 175/95, proposed a gradual elimination of federal taxes, which would be phased out over three years. These would be offset, during the phase-out period, with a bank transaction tax levied on bank accountholders. This formula would bring new taxpayers into the fiscal universe, making way for rates of other taxes to be reduced or, ultimately, eliminated altogether.

This was a prudent mechanism that would have permitted a risk-free evaluation of the new tax’s effectiveness. This approach even allowed for the possibility of using the bank transaction tax as advances on behalf of the traditional system, which might ultimately remain in place. This would have been an inexpensive technique, able to close traditional tax loopholes, making the traditional taxes more efficient in reaching the informal economy, tax avoiders, and tax evaders.

The second formula, PEC No. 183/99, called the Alternative Proposal, provided for a multiple system, with special emphasis on the bank transaction tax, and which would carry an additional function, that of funding social security along with excise taxes on alcohol, cigarettes, automobiles, telecommunications, energy, and fuel, in addition to a marginal income tax on windfall profits and financial market gains. This plan would abolish corporate income tax.

The third formula, PEC No. 256/00 suggested that a tax on bank transactions be adopted as a “social tax” that would replace all corporate social contributions earmarked for funding social security. The aim of this proposal would have been to remove from businesses the burden of social security payments, thus stimulating job creation.

The fourth formula boldly calls for all federal taxes and almost all federal contributions to be replaced immediately by a tax that, though not exclusively, would predominantly be levied on bank transactions.

The operational simplicity of this tax, its legal and administrative lightness, its low cost, and its evasion-proof characteristics, would make it a fiscal instrument of exceptional ease and flexibility. It would offer tax policymakers a vast menu of alternative applications, such as those illustrated in the formulae above.

On one hand, these features make the bank transaction tax incomparably better – relatively to any other tax – as an instrument for the attainment of the essential fiscal function of taxes, that is, to be an effective mechanism for collecting revenue. On the other hand, these same features leave empty-handed those who have interventionist leanings, and who insist on exploring the non-fiscal functions of taxes.

It is clear that, if fiscal interventionism prevails, the bank transaction tax could be adopted as a tax revenue instrument that is ancillary to other traditional taxes, eventually being offset against them. This would be a choice for continuity of a tax system that is complicated, cumbersome, and chaotic, with the only gain being it’s broader scope and a reduction in tax avoidance.

It is important to draw attention to something that has been overlooked by those who are well versed in the bank transaction tax as a tool for advance collection of other taxes. What they overlook is this: additional revenue entering from one side, coming mostly from the informal economy, can run out through the other side, via offsets and shrewd stratagems to be applied to the other taxes, as these would still provide loopholes that lend themselves to the same distortionary features decried in the current system.

If the bank transaction tax is selected just to be one additional tax, as happened with the IPMF/CPMF since 1992, this would be disappointing, because the distortions of traditional taxes remain, keeping a new scenario from flourishing, and preventing the qualities of the new tax from supplanting the shortcomings of traditional taxes.

Optimal use of the bank transaction tax, in the liberal vision of its formulator, Prof. Marcos Cintra, would effectively bolster the tax’s financial function because of its pure instrumentality as a collection mechanism. This would free the fiscal system of its confusing and inefficient non-fiscal responsibilities (except in foreign trade). These responsibilities would be transferred – with increased effectiveness and transparency – to the public expenditure side of the budget.

Along with the disappearance of current taxes, fiscal waivers and their obscure schemes of privileges and exemptions would also disappear. This would redeem the function of taxes as revenue collectors for the public budget. Only through this approach can the bank transaction tax fulfill its pledge to entrepreneurs and the entire population, a pledge to decompress fiscal obligations and controls, to greatly reduce fiscal costs, worries, and risks, freeing up resources for better use.


The history of economic thought provides at least two approaches to single tax theory. One, superseded by production modes themselves, was the Physiocratic idea of a single tax on land.

Another approach, which was never discussed seriously, was the single tax on capital. The brilliant French economist Maurice Allais, winner of the 1987 Nobel Prize in Economics, formulated this idea during the post-war period. Later, however, Monsieur Allais himself, without renouncing his tax on capital, expressly recommends that the European Union use a fiscal tripod that would also include moderate income and consumption taxes using value-added criteria, therefore abandoning the myth of the single tax.

Single tax utopias would perhaps contain a regressive psychological trait – the desire to escape the complexities of social life and return to the simplicity of pastoral living, a dream life without the entanglements of fiscal constraints. Opposing this utopian wish is the patriarchal, repressive dogma that demands complex tax systems, capable of dismembering all possible forms of economic wealth.

According to one perspective of tax psychology, the magnetic force of the single tax idea does not reside exclusively in its attractiveness as a single solution, which seduces a small number of intellectual speculators fascinated by unified theories, absolute systems, and closed architectures. Although this seduction takes root naturally in the human spirit, the truth is that the post-modern age has celebrated the triumph of the multiple, the diverse, the fragmentary, the open, and the relative. Complexity, diversification, and fragmentation of modern tax systems only mirror identical features within modern societies.

Rather, the magnetic force of the single tax idea stems primarily from libertarian pulsations deeply rooted in the hearts of mankind, a disposition toward anarchy, an aversion to oppression, all of which are consistent with the extreme individualism that typifies our times.

There is a heightened sense of discomfort over the State’s power of fiscal intervention in the lives of private citizens. The growing complexity of fiscal systems only multiplies the instances of control. Information networks squeeze more tightly. The rituals of civic exercise proliferate, draining increasing amounts of time and energy from taxpaying citizens, suffocating them and fueling (beyond mere aversion to taxes) rancor against the bureaucratic enforcement apparatus. This fiscal malaise stems from the powerlessness individuals feel when facing the coercive power of the State. Fiscal stress is aggravated by fiscal obligations that keep multiplying and fiscal regimes that keep diversifying. This in turn leads to increasing competition among economic agents, who search for situations that offer the greatest fiscal advantage. The individual feels caught in a trap, forced to run a fiscal gauntlet of permits and prohibitions. From one side they are pressed by enforcement agents and, from the other, by the need to survive and not lose ground to competitors.

This loss of taxpayer’s energy, which happens against their will as they tend to petty activities that only partly service the fiscal apparatus, is wasted on piles of paper, documents, proofs, checking and re-checking, deadlines, tricks, calculations, planning, and meeting with advisers, accountants, lawyers, and consultants. This creates significant discomfort to the taxpayer, and keeps him or her on the brink of fiscal non-compliance, tax evasion, delinquency, disobedience, and fiscal revolt.

The idea of a single tax has always harkened from afar, with the promise of significant relief of this discomfort, because of its simplicity and homogeneity. The other side of the coin, however, is that those who have achieved positions of obscure privilege and advantage – working within chaotic tax systems – namely, those who are most savvy at fiscal competition, the unseen partners of fiscal chaos, tend to resist such transparency, which is at the very heart of the single tax.

The simplicity and transparency of a single tax are weapons in the hands of citizens, to be used against antisocial types who, forever on a quest for fiscal privileges, are parasites and looters of the community for selfish ends. Chaotic fiscal systems are incubators of parasitic behavior.

If it is true that mankind cannot coexist without abiding by a “Social Contract”, then each of us should genuinely desire that any necessary contribution to the Common Good be as painless as possible, that it require of us little or no effort, that it not incite competition with our peers, and that it protect us from the anxieties associated with investigative and prosecutorial actions of the State. Thus, one can see clearly that the call for a light tax system that is simple, automatic, universal, paperless, non-declaratory, moderate, equitable, difficult to defraud, rests on solid foundations of tax psychology. These are the good foundations of the tax’s legitimacy, which ensure consent, a subjective presupposition that is indispensable to effective fiscal institutions.

To complete the list of requirements, tax scholars often identify in a “good tax” two others characteristics that remain to be discussed: progressiveness and allocative neutrality. Both are worthy of closer examination.


The term “single tax” is merely a nickname; the legal term is “tax on movement or transmission of values, of credits and rights of a financial nature.”

The legal term is complicated. It is for use by experts. For common use, of the terms “tax on checks”, “transaction tax”, “tax on bank debits”, or “tax on financial transactions”, the latter is the least imprecise. But it too is an abstract and uncommon concept, unlikely to become part of our everyday language. Even the term “single federal tax”, despite its imprecision, is easily recognizable and has the advantage of denoting the turn of events occurring at this moment with the PEC No. 474/01. This PEC is one phase of the single tax movement, a movement that burst open during the 1990s – an idea that already enjoys name recognition among the people. Use of the term “single federal tax”, instead of a less precise but perhaps less decipherable “tax on financial movements”, has undeniable communicative power, marketing and electoral appeal, and there is no reason to ever stop using it.

Nevertheless, Professor Marcos Cintra never intended – not in his earliest writings, even less so in his more recent proposals – that what he has successively called a “single tax”, “single tax on transactions”, and “single federal tax” would ever become an absolutely exclusive tax, nor even effectively single.

There is no intention to implement a destructive policy against Brazil’s tax system – far from it. PEC No. 474/01 acknowledges and respects the excellence of the current constitutional framework of Brazilian tax law. Rather, this constitutional amendment bill intends that the proposed tax revolution be molded – skillfully and with minimal alterations – in conformity with the current framework of tax law, which has been developed meticulously and has been highly celebrated by our tax scholars.

The bank transaction tax that is being proposed – which is both a tax and a contribution – is not a single tax. It seeks to become the predominant tax, responsible for the most substantial portion of State revenue, in healthy coexistence with other regulatory taxes.

It is also not a single tax, because it will coexist with service fees and police fees, contributions, user fees, and special contributions that can be sub-divided into social, corporate, and regulatory contributions. It will also coexist with compulsory loans and, ultimately, all other taxes contained in our Constitution. The section on general principles of the national tax system is preserved in its entirety, as set forth in articles 145 through 149, in which are merged the results of decades of taxation in Brazil.

It is not a single tax. It merely seeks to be quantitatively hegemonic, without damaging its qualitative solidarity with the variety of constructs found in current law, which cannot be renounced because they establish the boundaries for the taxpaying citizenry, within a democratic environment.

Without questioning the conquests in which Brazil’s Tax Law takes pride, the proposed amendment merely seeks to find a single formula that is simple, automatic, transparent, universal, difficult to circumvent, and that fulfills the fundamental financial mission of taxes, which is the collection of revenue necessary for financing the current activities of the State.

The proposed amendment aims to accomplish this without damaging taxes assigned to non-fiscal functions (that have little monetary significance), such as foreign trade taxes, or to any other specific and defined purpose, such as corporate and regulatory fees and contributions.

This wealth of instruments is desirable and does not need to be demolished. This diversity of levies does not affect most taxpayers on a day-to-day basis, but sporadically affects those agents involved in mutual relationships that seek specific government services. These are levies that have little financial impact, that do not even cast a shadow on the “single” tax.

For example, it is perfectly reasonable that someone traveling abroad should

pay, once every five years, a nominal fee for the issuance and control of his or her passport. There is no excuse for someone who throws a fit because the supposedly single tax does not seek to abolish a passport tax, an obviously naïve illusion. Passports represent a specific activity of the State on behalf of a limited number of taxpayers. Therefore, it makes no sense to require that all taxpayers fund passports through the single tax. The single tax is a generic tax earmarked for funding the collective activities of the State, on everyone’s behalf.

The generic activities of the federal State – which are significant in financial terms – and social security activities under an entitlement regime, which is also financially sizeable, would be funded by a single tax on bank transactions. PEC 474/01 is scrupulously concerned with introducing a new financial tax paradigm, a revolution in the basic financing of the State, a hegemonic tax collection formula – all without in any way damaging our good tax law architecture in those dimensions of the law that do not strictly address generic public funding.

Obviously, it would not be realistic to attempt to abolish, in the name of the single tax myth, the legal diversity and sophistication that are the result of much work and lengthy sedimentation through our history. Likewise, it would not make sense to discredit these proposed changes, under the unfair claim that it is timid because it does not destroy the elaborate and differentiated current legal apparatus. The simplicity we seek must not be mistaken for simplism. The great simplicity of this tax as the predominant mechanism for federal revenue collection is closely linked to highly sophisticated technology and law. The proposed tax simplification does not presuppose antagonism toward current tax law. Simplified tax collection does not imply a regression to an unrefined legal framework. In fact, this proposal does not address, neither should it, the naïve demand for extinction of all constitutional tax constructs other than the “single” tax.

It is remarkable to notice how this ambitious proposed tax revolution shines in its effort to avoid damaging current constitutional tax law, and how it accommodates constitutional tax paradigms without disturbing them.

This proposal calls for far fewer changes to constitutional rules than does PEC No. 175/95, the official “tax reform” proposal, despite the fact that this latter proposal’s modest ambition is merely to merge the consumption taxes into a single value-added tax.

PEC 474/01 states its purpose as the search for a balanced source of public finance. It is cloaked in prudent legal procedure. It is impregnated with a rational concept that challenges deeply rooted preconceived notions. It is founded on empirical evidence gathered during almost two decades the IPMF/CPMF tax has been in effect, and it echoes a recognized social demand.


The golden rule of tax reform theory is to prevent premature burnout of promising ideas by imprudence in their implementation. But such fear should not lead to inertia, apathy, complacence, and capitulation to prejudice. The pathway to good tax reform is a delicate razor’s edge, between defensive paralysis and careless impulsiveness; between rigid legal formalism and technocratic recklessness; between prejudicial distrust and unreflective compliance; between the general idealized interest and concrete articulated interests.

What ultimately drives reform is social demand. So long as that demand is not monolithic, it is incumbent on the reformer to pursue a balanced result that reflects its multifaceted composition.

At the beginning of the 1990s the proposal for the adoption of a retail sales tax, collected at the point of sale to the final consumer was well received by the industrial sector. It was a demand that would have done away with a value-added tax on consumption. Obviously unbalanced, this proposal would have relieved the industrial sector of its taxes, but would have overburdened the commercial and services sectors. Inspired by the United States’ model, the demand omitted other features of that model, none of which exist in Brazil, namely, a powerful, feared, and omnipresent tax enforcement apparatus; a predominant individual income tax; a huge middle class; and a property tax that in the U.S., can be as high as 12 % of total tax revenue, whereas in Brazil it is only 3%.

Once that solution was discarded, years were spent pondering the demand for a VAT. It too is unbalanced. This means that, in addition to conflicting with our federal system, it favors the organized industrial sector, large business, and exporters. But it harms the services sector and the great number of entrepreneurs whose accounting practices are rudimentary.

Meanwhile, the CPMF experiment flourished far beyond expectations, disarming alarmist predictions of banking disintermediation, market disruption, etc. Its discontinuation in 2008 reflects the result of a vicious political battle between the government and the opposition, rather than a negative evaluation by the Brazilian people.

During these years of tax reform discussion, we have seen a procession of misleading flavor-of-the-week jingoisms, employed as seen fit by various interested parties, such as “a good tax is an old tax,” “single tax, inequitable tax”, “a good tax is any tax you can collect”, and even this strangely passive expression that depicts low self-esteem: “a new tax, if it were good, would already exist in more advanced countries”.

Conditions are now ripe for a more audacious reform, which goes beyond imported models that, even in their own countries of origin, are criticized as being obsolete. What we need is a reform that is tailored to our situation, to our technological position, to our social profile, and to our administrative experience. It is fitting that we, at this point, question some paralyzing prejudices. We should examine with clear eyes some sample situations, and invite representatives of the various sectors of society, industry, commerce, services, agriculture, mining, banking, non-governmental organizations, public finance and social security administration, the scientific community, jurists, accountants, auditors, and professionals of information technology to spell out their perceptions on a tax system whose hegemonic base would come to rest on bank transactions.


One of the more technically persuasive variants of the complacent fallacy that claims, “a new tax, if it were viable, would already exist in more advanced countries”, is the mistaken supposition that a bank transactions tax is incompatible with tax harmonization.

It is alleged that globalization is engendering a trend toward increased harmonization of tax systems, particularly as it pertains to taxation of factors that have greater mobility, such as intangible capital and highly qualified labor. Double taxation agreements are multiplying, allowing for a reciprocal deduction of analogous taxes different countries levy against the same legally taxable event. The context of the allegation is that, because bank transaction taxes do not exist in most of our partner countries, except for five Latin American nations (Colombia, Ecuador, Peru, Venezuela, and Argentina), its existence in Brazil would constitute a roadblock to harmonization.

However, a logical impasse stands out at the core of this strange rationale, which its enunciators are not noticing and that should be explained.

This rationale unwittingly suggests that, finding themselves caught off-guard by globalization, national tax systems must become petrified and renounce all innovation; as if any tax measure to be adopted should be subjugated by the supposed priority status of international harmonization. A bank transaction tax, welcomed by many tax experts as the tax of the future, would be unable to gain that future, because implementation of such a tax would not become available immediately and simultaneously to all countries.

Such an argument calls for discrediting the historical, cultural, and endogenous roots of national tax systems. It suggests that transcendental paradigms should take precedence over local tax decisions that address each nation’s particular social, economic, and political circumstances. This argument would have each country eventually eliminate dissonant taxes. This raises the sensitive political issue of deciding which hegemonic tax profile to apply, and which benchmark of uniformity to use in order to abolish diversity, and to decide what should be considered an undesirable divergence.

The fanciful exaggeration of this line of reasoning is obvious. Of course, vectors of globalization and tax harmonization exist. We acknowledge them. But these vectors do not impose a veto nor do they make anathema those tax features that a sovereign nation deems appropriate for its own situation.


The objection discussed above takes on a more serious dimension than one might reasonably foresee. For example, the American Chamber of Commerce of São Paulo, though admitting that the simplifying perspectives of a bank transaction tax are exciting, decided to take a stand against adopting the single federal tax because, in its view (which appeared on its website), it would constitute a “disaster to foreign investment” in Brazil.

This judgment is based on the allegation that the OECD [Organization for Economic Cooperation and Development] and the United Nations do not acknowledge that the bank transaction tax is comparable to the traditional tax bases which allow reciprocal compensation under international double taxation agreements. To date, Brazil has not entered into a double taxation agreement with the United States. They, not we, are the ones who lack interest. Stemming from this, earnings, profits, and gains remitted to the United States are subject to Brazilian income tax. But U.S. law allows for compensations of the tax paid in Brazil with a similar tax payable in the United States, normally levied at a higher rate.

The argument is that US investors, accustomed to this treatment, would become upset if they could no longer enjoy this deduction from their U.S. taxes, and that they would have to pay the bank transaction tax, for which U.S. law allows no deduction, as it does not have a similar tax.

It is possible that this condemnation is the result of a hasty conclusion based on erroneous analysis. But it is a good example of how innovation, by abolishing deeply rooted habits, engenders resistance not always based on good reasoning.

Let us look at the example of distribution of profits and dividends. Since 1996, these have not been taxed in Brazil, the justification being that these would already have been taxed as corporate profits, through the IRPJ [Corporate Income Tax]. If remitted to the United States, these profits and dividends would be subject to full local taxation, with nothing to deduct.

If the Federal Single Tax were adopted, as proposed, the remittance would be taxed as a bank transaction at, say, a 2% rate. But, we must note that the remittance would be larger, because the tax and the contribution on profits, which are taxed at a 34% rate, would have been abolished! It makes absolutely no sense to turn down a 2% tax, following relief of a 34% tax! Where is the disaster in that?

Secondly, the burden is on the remitter. The accountholder in Brazil is the one who pays the bank transaction tax, not the beneficiary overseas. In other words, the foreign investor will benefit from a substantial increase, not a reduction, in his net return, making groundless the analysis that backs the claim above.

If remittances of other kinds of earnings are made (for example, payment for technical assistance services), the income tax withheld in Brazil is a 15% tax. Often the remitter in Brazil agrees contractually to adjust the basis of the calculation so that the foreign payment received by the foreign beneficiary would remain the same. But the burden would be lifted off the remitter in Brazil. Again, we fail to see where lies the disaster. In these cases we again believe the analysis seems groundless.

Even if this were not the case, it is beneficiary receives full payment, net of taxes, subject to taxation in his own country. In this case, the abolition of income tax, and adoption of the Federal Single Tax would have no effect on the appropriate to point out that ultimately the intrinsic mission of the tax system, far from being one of granting deductions foreign investors can claim on their own country’s tax returns is, first and foremost, the mission of collecting the resources necessary for basic operation of the home State. Any eventual stimulus for foreign investment is mostly a function of monetary policy, not only of tax policy.


More than one jurist has expressed the opinion that it would be impossible to tax bank transactions, because doing so does not correspond to any concrete economic fact and consequently, it could not constitute a legitimate tax base. This sophism spread during the early phases of implementation of the former IPMF [Provisional Bank Transactions Tax], but it did not prosper in the courts of law.

This argument impresses laymen, when in truth this is the argument that lacks concrete logical substance. This reasoning is more mythological than scientific, and disregards the historical foundations of tax theory.

The history of concrete tax practices shows that no country has ever exclusively taxed true economic substantiveness. The essence of taxation has always been, and still is, to tax indicators of taxpaying capacity, not to be confused with economic values. The old “rights of passage” were convenient methods, though unrefined, for capturing the presumed taxpaying capacity of a vehicle or load. The window tax, or façade tax, to which the architecture of Amsterdam owes its long houses with narrow fronts and tiny windows, was a practicable formula, albeit imprecise, for taxing wealth presumed to exist by the ostentatious use of spaces and windows on urban landscapes.

Some modern tax systems use complex assessment mechanisms in attempts to assess something approximating net income, net profits, or value-added, which are considered to represent substantial economic assets, or goods eminently susceptible to taxation. These would be the ideal tax bases because they would be the most faithful expression of purchasing power. But it is impracticable to build a tax system exclusively on these bases, because of the complexities of individualized assessment.

No country in the world taxes, exclusively, net profits, net income, and added value. Exact accounting of these values is only accessible to a small number of large taxpayers. Assessment of these values is always imperfect, and depends on a series of accounting conventions and legislative simplifications that are, themselves, approximations. Complete verification of these values, without sampling, is impracticable for any federal revenue agency in the world, no matter how well equipped it might be.

Thus, all tax systems in the world seek, to a greater or lesser degree, techniques for estimation, presumption, and forfeit, based on indicators. The result is that the correlation between taxes and true taxpaying capacity is always unsatisfactory.

In Brazil, only 15% of companies assess real profits, and only 3% of the population assesses its net taxable income using the full income tax form. Assessment based on presumed profits, the Simple [simplified method for taxing small firms], sales, or gross income, which are the predominant tax bases, also contains little economic substance. These are only approximations of taxpaying capacity that can be as misleading, if not more so, as bank transactions.

Many of the criticisms to the bank transaction tax simply disregard this fact. We should make it clear that such criticisms are groundless because they are impregnated with a mythological vision of taxation of net income and value-added, which does not exist in pure form anywhere.


Anyone who claims that bank transactions hold no correlation with taxpaying capacity (and therefore contain no economic substance) commits an impropriety. Such a person does not perceive, or obscures the fact, that he or she is reasoning based on an income paradigm, or more precisely, a paradigm of net earnings or increased net worth.

We must underscore this elementary mistake. Though increased net income could be chosen as an ideal tax base, it would be abusive to consider it the exclusive indicator of taxpaying capacity. On the other hand, though bank transactions may not always represent income or increased net worth (albeit this is often the case), this does not mean that bank transactions do not indicate taxpaying capacity.

A good example is a loan. Accounting shows that funds leaving the lender’s net worth to enter the borrower’s net worth only to once again return to the lender do not trigger a definitive change in the respective net worths of lender and borrower. On the other hand, payment for the loan (interest) decreases the net worth of the borrower, and materially increases the net worth of the lender. So it is fair that income tax should not be levied against the value of the loan, but rather only against the net income from interest, earned by the lender. The borrower, who pays the interest, would be permitted to deduct the interest as a cost or expense.

Now, this logical routine, which is valid within the mental universe of income tax, cannot exclude other dimensions of the phenomenon.

Obviously, the loan has economic substance; it is a manifestation of credit, a quantifiable economic asset. It also indicates the taxpaying capacity of its holder.

This asset, the foundation of financial leverage, can be used, spent, invested, made profitable, multiplied, renewed, “rolled”, and exploited economically. It is not income, so it would be absurd to tax it at high income tax rates, of between 15 and 27.5. But it constitutes a bank transaction, utilization of capital, which is indisputably an economic act. In fact, it is already subject to Brazil’s IOF tax [Tax on Financial Transactions], with a low rate, and until 2007 to the CPMF [Provisional Contribution on Financial Transactions], both of which would be replaced by the proposed bank transaction tax.

Now let us take the common case of a middle class wage earner whose only income is his monthly salary deposited into a bank account. Under normal conditions, this citizen will not play around with his money, needlessly withdrawing it and re-depositing it into the same bank account, over and over again, knowing he would be charged the tax repeatedly and pointlessly. If he makes a loan, the funds will leave the account and return to it, just once. Normally funds will be withdrawn only once, for consumption, leisure, charity, equipment, maintenance or increased productive capacity, or for savings and investments.

Funds withdrawn for financial investment will not be subject to the proposed tax, as the comments in the section below will make clear. Under the current system, the remainder, after allowed deductions and on amounts exceeding the exemption limits, would be subject to income tax, at rates of between 15 and 27.5%, and until 2007 to the CPMF – in addition to other indirect taxes included in the prices of products and services consumed.

Under the proposed Federal Single Tax system, the funds would be subject to the bank transaction tax, the rate for which would be nearly 10 times less than the income tax rate, in addition to indirect taxes included in the prices of goods and services consumed, which presumably would be less than what they are today. Currently, half or more of taxes included in the prices of products and services are pocketed by sellers, and not passed on to the Treasury. These become illegitimate income appropriated by criminal businessmen and disloyal competitors.

Because it is intended, in principle, to keep the tax burden unchanged, and since that revenue does not rain down from the sky, but does curtail the economy’s disposable income, clearly there is no magic. Any tax that ceases to flow from one place will have to emerge from other sources. And since tax avoidance is very high in Brazil, we should expect that the universally applied bank transaction tax would produce a healthy redistribution of tax incidence, and a subsequent easing of fiscal pressure. Reduction of taxes included in product prices will tend to occur as soon as business owners cease to act as tax depositories and as soon as tax evaders, now subjected to the inescapable bank transaction tax, are included in the taxpayer universe.

The case of a self-employed professional, whose earnings takes the form of numerous checks in small denominations, part of which will be used to pay suppliers, will differ little, if at all, from the case of the wage earner. In both cases, the taxpayer will feel unjustly taxed on that portion of his gross earnings that are paid out as costs, such as checks paid to third party suppliers. Those taxpayers whose business structure involves large bank transaction volumes that do not represent earnings will be hurt; namely, those enterprises, whether individual or corporate, that manipulate third-party funds, involving high costs and minimal margins. These enterprises would suffer – and perhaps even become impracticable – under this type of tax.

It might be fair, albeit not simple, to avoid this effect. On the other hand, this effect would not necessarily be a bad thing, insofar as it would discourage a whole range of speculative businesses that are devoid of true economic usefulness, since they involve using assets in order to seek profits in the intermediation game.

Adoption of the tax base comprised of bank transactions is perfectly compatible with building adjustment mechanisms capable of making the tax’s incidence fairer and better tailored to the diversity of individual circumstances. But, we should make clear that any adjustment or individualization of the tax presupposes that paper tax returns and interfacing with the federal revenue agency will survive. In other words, they would exclude the primary advantages of the tax, which are simplicity and low compliance cost.

Perhaps it is preferable to be taxed in a less sophisticated manner, thus avoiding auditing procedures of fiscal obligations, than to be taxed in a fine-tuned system while having to accept a lasting and costly relationship of dependency with the federal revenue agencies. The authors of the Federal Single Tax amendment place their bets that preference will be given to simplicity, low operational costs, abolition of the paper-ridden declaratory system, and elimination of all subjectivity in taxation procedures.


A tax should not interfere in the market cost of money. Neither should it drive a wedge into the returns of financial assets. The proposed tax (Federal Single Tax) postulates financial neutrality.

In previous versions of his tax model, Professor Cintra had envisioned a system of mirror bank accounts directly tied to checking accounts. Funds used for investment in the financial or capital markets would move through these mirror bank accounts without being taxed, except upon returning to their respective checking accounts. Business done in the financial and capital markets would be protected as if encapsulated, beyond the reach of any tax. Upon return to the bank checking account, net earnings from the investment would be taxed at a special rate, which in practice would represent a tax on earnings and capital gains. This would be the sole surviving remnant of the income tax.

In the current Federal Single Tax version, income tax disappears completely, taking advantage of the protective capsule, which translates into the principle of tax deferment, a necessity in a parallel accounting system. And the tax’s universality requirement would be preserved. In other words, funds withdrawn for further financial investment would not be taxed, but funds withdrawn for consumption would be taxed, regardless of their origin. If the funds withdrawn for consumption originated from financial investment, the amount of net returns withdrawn for consumption (and only that amount) would be taxed. Adventures and misadventures with financial papers would be emptied of any tax dimension. Bank transactions not earmarked for investment would be taxed. Taxation would be uniform, generalized, and proportional, regardless of the origin of funds.

The proposed model is not incompatible with a differentiated financial earnings and capital gains tax, but this would mean systematic control and assessment of net gains, which is contrary to the simplicity of the model. Therefore, we have a tax base that does not discriminate against its content – transacted funds – based on the legal or economic condition of their origin. But it does discriminate against the manner the funds are used, protecting savings and financial investment. The proposed tax base would be strictly limited to bank transactions not earmarked for debt, equity or securities.


With the preceding observations in mind, it becomes crystal clear that for individuals the single bank transaction tax acts as a light tax on gross income, preserving financial investments. That is, it is applicable to gross income that is not invested (consumed income). The bank transaction tax could be conceived as a practicable formula for approximating the Kaldor tax.

The expenditure tax, or consumed income tax, developed by Nicholas Kaldor in

1955 and later picked up by James Meade, the British economist and 1977 Nobel Laureate, has excited the imaginations of tax reformers, though it constantly runs into serious implementation roadblocks. To choose as a tax base those bank transactions that take place outside of financial and capital markets, which is the nucleus of the proposal now being examined, means opting for a simplified variant of the expenditure tax.

The tax system that would stem from this, once its functionality is proven, could potentially be apt to evolve into a progressive personal consumption income tax, which is the dream of modern tax reformers. All that would be needed in the future, as long as organized and mature demand exists for such, would be to make some concessions to supplemental complexities, in exchange for refinement of the tax’s equity feature.


The study of comparative tax systems highlights the tendency to overtax consumer items that could be classified as luxuries, vices, legally restricted consumption such as pornography and weapons, pollutants, non-renewable fuels, jewels, art objects, and durable goods. The list goes on to include cigarettes, alcoholic beverages, perfumes, drugs, controlled substances, items of conspicuous consumption, automobiles, pleasure boats, and sophisticated electronics. Once the single federal tax were adopted, with the corresponding proposed extinction of the IPI, possibly followed in the future by the extinction of the ICMS (a state valueadded tax), prices of that list of goods would become cheaper, which could be considered, under the circumstances, undesirable. These are situations that public policymakers might regret, and may be used to illustrate the ineptitude of the bank transaction tax as a regulatory instrument of intervention.

It is appropriate here to again underscore the rich potential of the current tax law system, defined in Article 149 of the Federal Constitution, which proponents of the federal single tax have made efforts to preserve.

The CIDE tax, an “interventionist contribution on economic domain”, which functions under highly flexible parameters, including its ability to avail itself of bases identical to those of other taxes, both current and extinct, is the perfect solution for filling these loopholes. It is an underused and recently rediscovered tax. We now have the fully functioning precedent of a CIDE on fuels.

A similar CIDE on cigarettes, for instance, would be appropriate. It is obvious that removing taxes on cigarettes would be disastrous for public health policy and a significant loss of public revenue. Current statistics show a deficit between tax revenue from cigarettes and public expenditures incurred in treatment of cigaretterelated diseases. The CIDE could easily be calibrated to cover this deficit. It has the advantage of being an earmarked tax linked to specific behaviors, which gives it an interventionist effectiveness which is much more precise than that of taxes on production and consumption.

The CIDE would be the appropriate instrument to replace, even overcome, the regretful absence of the selective IPI, the abolition of which is being proposed. The major advantage is that the CIDE does not have an exclusive revenue-raising purpose and can be fine-tuned to achieve well-defined intervention goals. It is also the appropriate instrument, within our constitutional framework, for incorporating the environmental taxes promoted by the OECD, which are now springing up all over the world.

A new CIDE, which would be crucial to the systemic equilibrium of the proposed model, would be the CET (tax equalization contribution), which thenDeputy Marcos Cintra introduced as a supplemental bill, aiming to add a levy on prices of imported products and services, equivalent to the cumulative effect of the single federal tax on national production. This cumulative effect would be estimated by using the matrix of inter-industrial flows developed and published by the IBGE [Brazilian Institute of Geography and Statistics].

The use of a tax rebate as a means of exonerating exports, applied at the time of shipment abroad, and the CET, which is applied on imports, are basic requirements for the bank transaction tax to be practicable. But this is a regulatory issue, the generic guidelines for which could be established through supplemental legislation.

Extinction of the IOF, the financial operations tax, would not be indispensable to the model, since it is inherently a regulatory tax, whereas the bank transaction tax is expected to replace all revenue-raising taxes. The proposal satisfies the intuitive yearning for simplicity, even taking into consideration that the tax base of the IOF broadly intersects with the bank transaction tax. Should it not be preserved, and its extinction cause uneasiness to the monetary authority, which eventually would desire a tax instrument to regulate financial markets, it would be perfectly in order to get hold (also in this sector) of the CIDE.


Under the proposed model, extinction of the ITR [rural land tax] would not be indispensable, because the ITR serves as a predominantly regulatory tax, producing only nominal revenue. Again, in this case the proposed bank transaction tax would fulfill a simplifying function, considering the historical ineptitude of this complicated tax instrument in Brazil. It could be justifiably eliminated altogether, consistent with the paperless aspect of the proposed model.

Truthfully, the ITR has been auctioned off by the Union, either to states or municipalities, during its most recent attempts at tax reform. The reason for this is found in the difficulties faced in implementing the tax against the interests of a politically influential segment of rural landowners. But it would be unusual, within the context of comparative tax systems, if Brazil were to devote itself to taxing urban real estate and omit taxation of rural properties, even if only to repress speculation in which land is amassed as a reserve of value. The elimination of any land tax instrument in Brazil could appear detrimental to the international image of a country that has already been negatively distinguished as a leader in inequality of income and wealth, and in insufficient use of its agricultural potential, with serious turmoil in its rural areas. The ITR could be preserved. However, should its elimination seem appropriate, nothing prevents the CIDE from replacing it, with revenue earmarked for administration of land reform.

One weakness acknowledged by scholars who have carefully studied consumedincome tax models is that landowners find themselves in a privileged position, compared to those who do not own land. These privileges include being able to avail themselves of loopholes in order to circumvent taxation. The proposed federal single tax is aimed at discouraging the acquisition and transfer of non-financial assets. Funds used for real estate acquisition, and for its sale, would be taxed whenever nonfinancial assets are again mobilized.

To a certain extent, the model can be accused of favoring asset freezing, since it favors directing saved income toward investment in equity and securities.

Because the model is initially to be circumscribed to the federal sector, state and municipal rural land taxes would remain in existence, as would the tax on transfer of assets among the living or following death. It is worth noting that globalization tends to promote resumption of non-financial asset taxation precisely because of its inaptitude for cross-border mobility.

Doctrine points to taxation of personal wealth as the antidote against the abovementioned asset immobilization. It is also with this in mind that Maurice Allais recommended taxation of capital. Taxes on wealth have this peculiarity, that they tax the fruition of wealth, encouraging it to be mobilized and to produce profits, penalizing immobilization. In other words, they do the opposite of what the proposed federal single tax would do. One could counterbalance the other.

Thus, a tax on wealth, which is being suppressed in Brazil without ever having come into force, could perhaps be preserved, despite its declaratory characteristic, for which the authors of the proposed federal single tax have little appreciation. But it should be pointed out that the wealth tax would affect a small number of individuals who own far greater assets than average, perhaps 100,000 individuals. As such, it would serve as a social and progressive counterweight to the proposed model, with no great ambition as a revenue producer.


The often praised redistributive effect of tax systems has turned out to be somewhat disappointing in most countries. It would seem to make more sense to admit that when there is political will to redistribute, the most effective instrument is budgetary allocations, not the tax system.

The most repeated criticism of the federal single tax is that it would be regressive. This, however, is not the right argument to engage in, but rather whether this regressiveness might not also be much smaller and less harmful than the regressiveness of the taxes it proposes to replace.

The simulations Professor Marcos Cintra has published support this opinion, and recent studies published by the Federal Revenue and by other experts corroborate it. Furthermore, it has been empirically verified that, contrary to what had been thought, cumulative taxes on gross sales (the PIS/PASEP/Cofins taxes) demonstrated almost uniform and proportionally distributed incidence in all income brackets, whereas, the IPI, a selective value-added tax, rich with exemptions and differentiated rates, reveals an almost imperceptible progressiveness, as does the ICMS [a value-added state tax on circulation of goods].

The paper, “Progressiveness in consumption”, published by the Federal Revenue, after revealing evidence that cumulative taxes behave quite like an ideal VAT, from the perspective of their impact on consumers, states that the irregularities of the ICMS and the IPI, both in their legislative profile and in their practical application, fall short of being the ideal VAT. The report concludes by suggesting that VAT supporters should increase their caution.

This reinforces the thesis that moderate cumulative taxes that are simple, uniform, and easily audited are less distortionary than value-added taxes usually with higher rates, full of exemptions, and always subject to heavy tax avoidance.

For its part, Brazil’s income tax is falsely progressive. Its base is highly restricted and irregular, and the progressiveness of the tax rates by income brackets is heavily mitigated, and does not extend to capital income. Informal markets and tax avoidance predominate. Rent earners, entrepreneurs, and self-employed professionals are clearly favored when compared to wage earners. The theoretically fairest tax in Brazil is actually extremely inequitable. As we have stated earlier, it is actually a tax that is overwhelmingly levied on one restricted segment, middle class wage earners.

The choice of a comprehensive, regular, uniform base that is difficult to evade – by itself – reduces the regressiveness of the system. Replacement of the income tax with the proposed federal single tax would mean an immediate broadening of the taxpaying universe, from the fourteen who pay the personal income tax to the 27 who pay the CPMF.

By incorporating into the taxpaying population this vast segment of tax avoiders and those involved in the informal market not usually reached by the traditional tax systems, the pressure on actual taxpayers would both spread and be eased, providing a fairer profile to the fiscal system.

The remaining 180 million people, who do not have the possibility of making bank transactions, will not experience any direct effect of the proposed tax on their gross income. This, undeniably, is enough to make it clear that the system has some degree of progressiveness.

The nature of the system within which the federal single tax functions is compatible with policy measures that could be used to give the system an even stronger progressiveness. Even the authors of the proposal stress the ease of applying progressive rates as a function of transaction volume by a single accountholder within a given period of time. Another possibility would be for employers to assume the onus of the tax on paid wages, up to a given amount.

Lastly, we must address the objection concerning the possible allocative impact of the bank transaction tax on production chains. There is no way to avoid such an impact without sacrificing the proposed tax’s simplicity, which is its fundamental feature. The impact of the CPMF at the rate of 0.38% seems negligible, but it would become much more noticeable if the rate were ten times higher.

Professor Marcos Cintra’s studies aim to demonstrate that the resulting distortions would be less than those that stem from adoption of value-added taxes (ICMS + IPI + PIS/Cofins) with rates that add to 34% or more, as will be demonstrated ahead. It is almost intuitive that it would be practically impossible to avoid widespread evasion of a consumption tax of that magnitude. We hope that future empirical studies will be able to better illumine this aspect of the problem.


The most obvious beneficiaries of the proposed federal single tax system are the habitual victims of our current non-comprehensive income tax. Middle and upper class wage earners in the formal economy would experience significant increases in disposable income.

A corollary would be that a vast segment of economic agents would be included in the taxpayer pool. As it is now, these agents manage to circumvent income tax, either because they are exempt or immune to them, or because they are in the informal economy, or even because they are tax avoiders or evaders. A Federal Revenue study using 1998 data reveals 16.9 million people exempt from income tax; and 11.7 million non-registered economic agents – all of which would be included in the pool of bank transaction taxpayers.

The bank transaction tax would decrease the current under-taxation of financial investments income and of capital gains. Profits and dividends would begin to be taxed upon distribution, but the personal income tax (IRPJ) would be abolished, resulting in a significant net gain for anyone who presently pays it and a loss for those who circumvented it, or who made use of irregular methods of profit distribution. Beneficiaries of income tax waivers, special regimes, and localized deductions would lose. For example, the tax advantage that loan capital has over own capital would disappear, with the dissolution of tax benefits for indebtedness.

The cost of labor would decrease significantly, with the discontinuation of employer social contributions and income tax withholding of wage earners. This effect will greatly enhance employability, as well as business operations, especially in labor-intensive industries. Business tax planning would be simplified and tax administration costs, whether personal or outsourced, would greatly decrease.

In addition to these general issues, the breakdown of the distribution of gains and losses is the most challenging issue to be discussed on tax reform, and deserves further research and analysis by all sectors involved.


If the Federal Single Tax is approved, it is not the bank transaction tax itself that may cause apprehension, but rather the level of the rate to be applied. Because the quantitative leap would be sizeable, up to ten times the present rate, it is likely that the qualitative dimensions of this tax could undergo significant changes.

The CPMF experience, since 1992, has already caused a strong impact, throwing aside traditional arguments that express hesitancy and aversion concerning a bank transaction tax. Its discontinuation, as of 2008, was caused primarily for political reasons, rather than for solid economic arguments.

Andréa Lemgruber and others have conducted research on the impact of the CPMF which, since 2001 have been published on the Federal Revenue’s website. These studies effectively disprove those arguments born of incredulity and antipathy, which stained a great amount of paper during the past decade.

Experience confirms, and the paper published by the IMF No. 01/67 acknowledged, that the tax, at least with moderate rates, as has been the case in Brazil, has been successful. It did not cause bank disintermediation, did not increase the preference for use of paper currency, did not cause a fall in the use of bank checks or debit cards, did not inflate prices, did not raise the cost of money, did not hurt investments, did not trigger dramatic restructuring of productive cycles, nor did it increase the regressiveness of the tax system. And it had little influence on the competitiveness of Brazil’s products abroad.

But it must be remarked that the proposed bank transaction tax’s hike to a new level is not equivalent to a higher CPMF, merely adding new tax obligations to those already in place. Rather, it means something wholly different. It means having a bank transaction tax that replaces almost all other federal taxes and contributions currently in effect. It would imply a beneficial replacement of the present tax burden for another with a distribution profile that is purposefully more widespread. As such, it is presumably more balanced and milder.

What we want to foresee is the public’s reaction, not to an increase in the current tax burden, but rather to its restructuring, with a new profile that will ultimately take a friendlier shape. A ten-time multiplication of the CPMF tax rate, that would be necessary for implementing the Federal Single Tax, would obviously be intolerable if it were merely an add-on to current taxes. That would effectively double the federal tax burden – completely out of question.

This is an ambitious target. Its implementation may require (at the time this text was written) a tax rate of approximately 3.5% (1.75% on bank account debits, 1.75% on credits), to be applied to each bank transaction. This estimation is the result of a somewhat simple extrapolation based on the current pattern of bank transactions and on current productivity of the CPMF which applies a 0.38% rate, with predicted revenue of 20 billion reais annually.

It is likely that the profile of bank transactions might undergo some changes in response to a rate that is ten times higher. But it is also possible that the tax’s productivity will increase, in response to more severe fraud deterrent regulation. Fraud already detected and eliminated by the Central Bank and the Federal Revenue allow for estimated revenue that is potentially 10 to 20% higher than current estimated revenue of the CPMF.

This basic calculation should also be adjusted to the proposed extinction of all exemptions and immunities, except for reciprocal immunities among political entities of the Federation. Such increased revenue would probably compensate for the drop in revenue caused by the suggested system of taxation for the financial and capital markets.

In view of these generic parameters, it is clear that, for the time being, the search for more precise estimates would be a useless exercise. The only way to perform a conclusive empirical test of the model is to follow its implementation. This reveals the proposed tax’s flank most exposed to criticism, albeit subordinated to highly hypothetical reasoning.

The most skeptical critics will continue to place their bets on the assumption that it will be impossible to tax bank transactions at rates higher than 0.5%, or at most 1%, and they predict society will mobilize on a large scale to find ways to evade taxation of bank transactions.

The most optimistic critics will say that such figures are superstitious, and that everything will run smoothly, as it did with the 0.38% rate, because potential forms of evasion had already been exhausted or overcome.

A realistic posture must acknowledge that efforts to avoid taxation are normal, and predictably will increase since, as the rate increases, so do the rewards for avoidance. Tax avoidance measures that are not attractive at the current 0.38 rate could become much more attractive if the rate is multiplied ten times. Therefore, it is appropriate to ponder the viability of implanting effective deterrent measures, and to consider ways to prevent attempts to dodge the tax.

The measures considered within the legislative bill of the proposed tax, such as prohibiting endorsement of checks to third parties, demanding premiums to those who write bearer checks, punishing of those who write them, discouraging the use of cash, and others that may be proposed, are all infra-constitutional and regulatory measures in the commercial, banking, criminal, and administrative areas, and therefore extend beyond the bounds of a constitutional amendment.

It would be inappropriate to dwell into the details of these measures at this time, neither should they detract us from the focus of the discussion which addresses, not a complete fiscal package, but rather a political choice among taxation models in a democratic discussion within the Legislative.

Nevertheless, along with the proposal’s economic and political dimensions, discussion of the requirements for institutional analysis is also indispensable.


The saying that “taxes are, first and foremost, administration” still holds true. A clear-thinking tax analyst should always give priority to the conditions for implementation of a given tax, relative to the eventual qualities of its theoretical profile. For example, Brazil’s income tax is sharply disassociated from its theoretical paradigm and from its explicit principles, as contained in the Constitution. This is true because of the fragility of the administrative apparatus in charge of its execution.

A necessary and indispensable assumption of any realistic tax reform is the existence, current or potential, of an institutional apparatus that is empowered to enact the adopted legislative framework. This means that prior analysis of the institutions is fundamental. Without a solid fiscal apparatus there can be no State. A federal revenue agency is a basic component in the nuclear structure of the State, an indispensable requirement for good governance.

Tax policies vary, fiscal experiences come and go, but a federal revenue apparatus must be the filter that collects the product of this historical alchemy. It would be imprudent to weaken the federal revenue agency. The wisdom of tax scholars has never ceased to stress that a good tax depends, first and foremost, on administration. The federal revenue agency must be preserved and cultivated as a permanent institution.

Occasional specializations, which depend on whatever tax policy is in place at a given time, should never exclude a bureaucratic structure that is well founded, solid, diversified, continuous, capable of accumulating knowledge, history, techniques, and values. It must be capable of critical observation, researching, monitoring world events, evaluating, adapting, forecasting, and thinking in the long term. The triggering of a given specialization by a circumstantial fiscal experience is no justification for dismantling other components of the taxing apparatus.

Of course, it would be unrealistic to think that implementation of an hegemonic tax, however simple its administration might be at the operational level, would lead to extinction of the federal revenue agency. It would be unwise to feed this illusion born of romantic liberalism uncommitted to the responsibilities of public administration. It would be unrealistic to suppose that a transaction tax (or any other tax) would signal the end of fiscal administration and the apocalypse of bureaucracy.

Technical analysis of the proposed tax should take care to undo any artificial amalgams between this interesting tax administration experience (the federal single tax) and any eventual leanings of its sympathizers towards the “minimum State” and similar ideologies. The bank transaction tax does not mean, a priori, any necessary ties with ultraliberal, anti-bureaucratic, anti-Statist, or anarchical postures. Nor is it in any way incompatible with the social-democracy worldview or with the realities of the “techno bureaucratic production mode”. Tax agencies are an essential public duty that must reach beyond circumstantial fiscal policy, just as diplomatic bureaucracy surpasses occasional choices in foreign policy.


The Federal Revenue has prosecuted a number of large banks for practicing premeditated fraudulent procedures that lend themselves to evasion of the CPMF, in amounts of approximately 5 billion reais, though this figure is expected to reach 8 billion reais.

The banks claim that they were exercising a legal form of tax avoidance. They were doing so to benefit large clients, probably in exchange for some reciprocal benefit. These banks used their legal authorization to endorse checks issued by large clients and to transfer large values to the bank’s bond and securities distributors. These distributors, in turn, credited the accounts of the vendor’s of those clients, without paying the CPMF, thus bypassing a bank transaction in the client’s checking accounts which, otherwise, would have been charged the tax.

This is a typical maneuver that makes no economic sense, showing patent irregularity on the part of the securities distributors whose business objective does not include making payments to vendors of the bank’s clients and their associates. The sole purpose of the maneuver was to evade the tax. This ploy, which of course reduces tax revenue, also distorts the distributive impact of the tax and aggravates its regressiveness, since it favors large clients to the detriment of others.

The maneuver was relatively elementary and predictable, as is the transformation of bearer checks into quasi-money and other formulas – fraudulent or not – for avoiding the tax. Banks fear the loss of a formidable flow of funds, and feel a strong temptation to take advantage of this situation, if not outright appropriation of some residual sums for their own benefit.

The only way to prevent or repress the natural propensity to evade the tax is to have a well-equipped federal revenue agency that acts persistently, even fiercely, to deter it. The truth is that there is not, there has never been, and there will never be a completely fraud-proof tax system. It is an illusion to imagine that any tax system could do away with a tough auditing structure.

A simplified tax system might require a more light-duty federal revenue apparatus that is more specialized and targeted. The hegemonic bank transaction tax would certainly relieve the general citizenry of any worries with the federal revenue agency, which would direct its efforts to auditing banks. This might explain bank reticence about this tax.

Thus, it is impertinent to view the struggle for a bank transaction tax as a sort of vendetta against the alleged oppression of a voracious federal revenue agency. This feeling would only fit that limited segment of the population that is subjected to localized tax surcharges, but it would not be a shared sentiment among the population as a whole, which is invisible to the federal revenue agency. The federal revenue bureaucracy, first of all, does not have a genetic predisposition against a bank transaction tax. Secondly, it would not be disposable, even in the ideal scenario of a single tax on bank transactions.


Most developed countries depend on traditional tax collection systems for public revenue. Therefore, due to respect for traditions, cultural preferences, collective resistance by agents of the public treasury, or strategic posturing, those countries view Brazil’s bank transaction tax experience with reticence. It is highly unlikely that, over the medium term, the population of these countries would agree to turn over to private banks the function of public tax collection. They prefer to tolerate the costs of heavy federal revenue bureaucracy – perhaps antiquated, but reliable, under oath, and imbued with the spirit of public service – than to turn this traditionally public function over to what many see as organizations of mercenary money merchants.

The fallacious claim that “if the bank transaction tax were good, it would already have been adopted in developed countries,” errs precisely because it ignores one tiny detail, to wit, that the bank transaction tax can only be economically viable, and can only be competitive as a tax revenue instrument, in a country that enjoys advanced and well-distributed banking information technology. Furthermore, that country must also consent to delegate the collection of public revenue to the banking system. It is this very requirement, which Brazil fully meets, that prevents other developed countries – despite their growing curiosity about the bank transaction tax – from adopting this technique.

Whether they, or we, are correct depends on historical, social, administrative, institutional, and political factors that would be too lengthy to explore here. But it is important to understand that mere economic analysis is insufficient for deciding on tax reform. Institutional analysis is also important, and often decisive.

Any sensible observer would agree that the State, which embodies the public interest, and particularly the public treasury, cannot be subjected to being brought to its knees by the unpredictable capriciousness of banking operators or by the extremely self-oriented interests of the finance barons.

This reservation, does not exclude, however, acknowledgement of the lengthy experience Brazil has had using the banking system for tax collection. No serious setbacks have been recorded in three decades of experience. It is possible to believe that the Central Bank and the Federal Revenue can satisfactorily control the banking system. But this should not prevent concerns over what could happen in a scenario of an eventually weak government and lax institutions.

If the banking system were to assimilate the functions of the public treasury, it would give banks enormous bargaining power. At the same time, it would subject them to the discomforts of government investigation and control. This is the reason bank directors still maintain a reticent and ambiguous posture concerning their playing this role.


Since the end of the authoritarian regime in the mid-1980, Congress has had a difficult time overcoming its timidity about exercising its prerogative to evaluate and influence tax policymaking in Brazil. It is a verifiable fact that even today nearly 90% of all tax legislation derives from the executive branch.

Executive branches of government are growing by gargantuan proportions, while legislative branches are shrinking. This is a common phenomenon throughout the world. Therefore, of course, no one is thinking of competing with the formidable machine of the executive branch in the complexities of tax execution. It would not be reasonable to expect the legislative branch to build complete fiscal systems. But the definition of more generic guidelines for tax policy falls fully within the scope of the legislative branch, in response to social demands.

The proposal for the “federal single tax” has merit in that it constitutes a formulation entirely and genuinely consummated within the environs of the legislative branch. Of course, notwithstanding the exceptional scientific qualifications of its major proponent, it cannot pretend to embody an exhaustive fiscal system. But it does outline the generic makeup of a complete tax model, which is offered as a viable alternative to the obvious impasse in the tax reform proposed in PEC No. 175/95, and others that came after it.

In order for the proposed model to be appreciated, it is not necessary that it be propped up with exhaustive regulatory detail and exact numerical forecasts. This, of course, is not possible without the cooperation of the executive branch.

The proposal of a VAT, for its part, despite originating in the executive branch, cannot guarantee its results. Every time tax policy guidelines have been approved, approval has come with the unspoken understanding that the taxes adopted would lead to heavy tax avoidance, the repression of which would be incumbent on fiscal agencies. Public policy choices cannot rely on advance guarantees of full execution. They need reasonable indicators of viability.

The 1965 tax reform, which is still Brazil’s major tax benchmark, was adopted even prior to the formation of institutional agencies capable of implementing it. These were formed slowly over subsequent years, which meant that the tax reform did not enjoy immediate and automatic effectiveness. Guidelines were defined first. Conditions for implementation came later.

The institutional scenario is different now, much more sophisticated, capable of speedy approval of the new proposed model, without apprehension about continuity, even if only because the current economic situation would not tolerate gaps in providing public revenues. Finally, this is about appreciating an innovative option for tax policy, based predominately on bank transactions that do not represent savings, offered as a viable solution to the impasse in tax reform.

What is left to decide is whether it meets society’s demand for a tax system that is broader and whose incidence is more equitably distributed, that is simpler, smooth, universal, cheap, effective, and difficult to evade.




After publication of the article entitled “For a tax revolution”, in the Folha de São Paulo, in January 1990, the Single Tax proposal contained in that article gave rise to a controversy that deeply involved public opinion, and brought fresh air to the technical debate on the subject.

The article held that the Brazilian economic situation demanded a sweeping tax reform. This is still true nowadays. It called attention to a wrong turn taken by the debate. Tax reform was being treated in a restricted manner, merely as a program for guaranteeing tax revenue. Measures such as fighting tax evasion, reducing tax incentives and subsidies, and tax expenditure planning were frequently seen not as objectives in themselves, but merely as means to increase government revenue and, therefore, to balance the public deficit and to reduce inflationary pressures resulting from constant budget disequilibrium.

Issues related to the efficiency of tax mechanisms, their equity, costs, incidence patterns, and other important questions were given secondary attention. Taxation was assumed to be a necessary evil, affording few options for improvement and innovation. Further, the simplifying and highly stylized postulates of neoclassical economic theory were uncritically accepted, producing theoretically efficient models from a distributive and allocative perspective but devoid of sound judgment about the realism of their assumptions.

The complexity of Brazil’s tax structure had already been a subject of discussion for decades. The countless forms of taxation (such as income taxes, valueadded taxes, estate taxes, not to mention taxes on services, quasi-fiscal contributions, compulsory loans, fee surcharges, etc.) made it absolutely impossible to arrive at any trustworthy conclusion about the characteristics of Brazil’s tax system, such as its alleged regressiveness, its efficiency, etc.

The text on the Single Tax contained a forceful demand for a broad tax reform that would encompass all of these issues, but in a context in which the formulators of economic policy would not be constrained to existing fiscal and operational procedures.

The idea of a Single Tax polarized the debate on tax reform and triggered two major reactions. On the one hand, were those who supported a bureaucracy-free system using the Single Tax as an important foundation in the debate. On the other, were the supporters of the orthodox paper-driven declaratory tax structure, who unleashed a violent criticism against the single-taxers.

In 1992, Roberto Campos published an article in the O Estado de S. Paulo titled, “Exógenos e papirófilos”, in which he explained in his inimitable style the important points that clearly differentiate the two currents that emerged as the debate intensified. In order to synthesize the issue, he labeled the two groups as the “exogenous” and the “papyrophyles” distinguishing the first, who argue for a simple, evasion-free structure, from the second group, that calls for maintaining, albeit with improvements, the current complex and bureaucracy-laden system.

The first group rejects paper-driven declaratory taxes. Such classical taxes force the taxpayer to submit tax returns and the revenue agency to assess and audit taxpayers. The compliance and auditing costs are enormous and assessment involves subjectivity, making the temptation to evade almost irresistible.

Roberto Campos states, “The papyrophyles, who have forgotten that they live in the electronic age, love the bureaucracy of documentation. These include income and property tax returns, production or consumption invoices, receipts for services, and payroll taxes. There is a bureaucratic ‘delirium tremens’. In 1990 alone 1,062 fiscal instruments were handed down by the Government, including laws, decrees, executive orders, and regulatory statements. That is 4.6 new regulations per business day! Over 33 accounting books are required, eight accounting ledgers, six corporate ledgers, nine fiscal books, six labor volumes, and 24 different tax declarations. There are 25 basic labor and social security obligations!”

It is fair to suspect that today, almost twenty years later, the bureaucratic complexity is probably even more intense than it was then.

Campos estimates that “in 1990, the cost of tax collection for the four revenue agency levels – federal, state, municipal, and social security –amounted to US$3 billion. That is, 3% of GDP. For corporations, the cost of compliance was even higher. At least one third of administrative costs, or approximately 5% of GDP, represented bureaucratic and legal expenditures involved in paying taxes.”

The group that argues for the paperless non-declaratory system, called “exogenous”, according to Roberto Campos “proposes that different tax bases – income, consumption, production, and labor use – be replaced by a single bank transaction tax collected through the banking system. This tax would be exogenous, automatic, and evasion-proof. It would be exogenous because it would not depend on returns filled out by the taxpayer. It would be automatic in that it would be a simple charge against use of banking services. It would be evasion-proof, because in a modern economy banks are indispensable, financial supermarkets that offer diverse services. This is especially true in Brazil, where there is minimal use of paper currency to prevent robbery.”

According to Roberto Campos, “there are differences in thinking among both the ‘exogenous’ and the ‘papyrophyles’. The ‘radical exogenous’ want the bank transaction tax as the only revenue tax (only economic regulation taxes would survive, such as the import tax). Moderates would allow for six taxes on specific products (excises), in addition to the bank transaction tax. Those products are energy, fuels, communications, vehicles, alcohol, and tobacco. These taxes are collected at the production unit of a limited number of producing agents, exempting tax collection at the subsequent stages of trade and consumption, and would not require taxpayers (consumers) to fill out returns.

“There are also the ‘dietetics’ among the papyrophyles. These want to trim taxes down, from 15 to five (the Ives Gandra proposal). There are also the fatty, (as in the proposal by the Executive Committee on Tax Reform), who would create - ´horresco referens´ – two new taxes: a tax on corporate assets and a selective tax on specific products. The common weakness of all proposals by the ‘papyrophyles’ is that they preserve, to greater or lesser degree, the corrupt bureaucracies of revenue agencies and the documentation hell faced by the taxpayer.”

Roberto Campos believed that the only fiscal model worth its salt is the one that can claim to possess four desirable features and to avoid five unwelcome effects. The desirable features are:

1. A tax base that is comprehensive enough to circumvent the barrier between the informal economy (which pays no taxes), the state economy (which pays little), and the fiscal “victims” (payroll employees and formal sector companies);

2. Low tax rates in order to convert tax evasion from an act of cunning into an act of outright deceit (in the single bank transactions tax the threshold seems to be 2% to 3% on each side of a bank transaction – debtor and creditor);

3. Automatic, not primitive mechanisms for tax collection;

4. Instant pass-through of shared revenue to beneficiaries – the Union, the states, the municipalities, and social security.

The five effects to be avoided are:

1. The underground economy effect – non-registered payments (for example, fiscal blackmail and tax evasion );

2. The government corruption effect – corruption in intermediation of public funds;

3. The “Tanzi” effect – inflationary corrosion of revenue between time of collection and actual availability of funds;

4. The “papyrus” effect – the proliferation of documents and tax books;

5. The “toga” effect – when tax cases logjam the judiciary branch.


The Special Committee on Tax Reform of the Chamber of Deputies began working in 1995. At the time, Deputy Mussa Demes presented four versions of the Committee’s report. Three of those were not even read for lack of parliamentary support. The last version, dated November 1999, was voted and approved by 35 votes in favor, and one against, that was my solitary vote. This majority approval, however, did not mean that a technical or political consensus had been reached.

The bill that was approved in the Committee incorporated an orthodox vision of tax reform, with three basic characteristics: a) the unification of circulation taxes (ICMS, IPI, and ISS); b) the elimination of cumulative social contributions; and c) the creation of a comprehensive VAT that would merge all those eliminated taxes and contributions. The Committee assumed one commitment, that of maintaining government revenue constant.

Such proposal ignored two fundamental aspects of a good tax reform in Brazil. It also made one fatal error. The omissions were: a) it excluded the personal and corporate income tax from the reform, and b) it did not exonerate the heavy labor social contributions paid by company payrolls. The technical error was that the rate of the new, comprehensive VAT had to be excessively high to keep constant the present levels of revenue, and this, strongly stimulates evasion.

A tax reform must find solutions to several fundamental problems. It must be able to guarantee adequate revenue collection – so the government can meet the demand for public services; it must be neutral and seek allocative efficiency to minimize tax-related distortions in the decisions of economic agents; it must be simple and inexpensive in order to minimize tax compliance and administrative costs; and it must be fair, respecting current standards of social equity.

Additionally, as Everardo Maciel, former Secretary of the Federal Revenue, recalled in his speech on August 7, 2001 at the headquarters of the Federação das Indústrias de Brasília, “there is no tax system that is good and adequate for every country in the world. In modeling the tax system, one must not fail to consider the political situation, the cultural tradition, and the stage of economic and social development of a given country. There is no model that can simply be transported from one country to another.”197

The various bills presented before in the Special Committee on Tax Reform sought to meet those criteria. Each bill under discussion has its advantages and disadvantages; each makes advances in some areas and back steps in others. However, there are two preliminary problems that, if not addressed properly, will make any tax reform become a mere attempt at “perfecting of the obsolete”, to paraphrase Roberto Campos.

The first is to improve the pattern of tax incidence in Brazil. It is well-known that the average tax burden has greatly increased, from 23% during the 1970s and 1980s to 35% today, in tandem with the narrowing of the tax base. The rise in evasion, avoidance, and flight to the informal economy was stimulated, and resulted in a tax system that overburdens the formal economy, asphyxiates organized businesses, and hurts the registered wage-earner. As Mário Henrique Simonsen taught us: “A fair tax is one you can collect”. Contrario sensu, the worst tax is one that can be evaded.

The second is the high cost of the current tax system. Society bears a heavy tax load in order to meet several fiscal demands such as maintaining the Union’s gigantic tax collection machine, maintaining the expensive social security program and financing the operating costs of the legislative and judiciary branches whose responsibility include legislating and judging millions of tax-related cases that clog Brazil’s courts. We must also add the administrative and compliance costs of individuals and of corporations that are related to the system’s bureaucratic demands.

The Special Committee on Tax Reform set the stage for discussions about two opposing concepts concerning the construction of a new tax model for Brazil.

On one hand stands the orthodox view espoused in the text of the Tax Reform Committee’s reporter, Deputy Mussa Demes. On the other hand, inspired by the Single Tax proposal, is the Alternative Proposal, inspired by the Single Tax, a daring and innovative concept of which I am the author,(198) and which assembles the contributions of several deputies and ex-deputies, such as Luís Roberto Ponte, Francisco Horta, Alberto Mourão, Edinho Araújo, and Ronaldo Vasconcellos. This proposal stresses the rôle of paperless non-declaratory taxes, the principal feature of which is that they can be collected automatically using information technology and

197 [MACIEL, 2001]

198 See [CINTRA et alii, 1999].

thus eliminating tax avoidance and evasion. Collection of these taxes has low-cost and is free of bureaucracy and, therefore, immune to corruption.

The final report produced by the Special Committee on Tax Reform proposed a conventional tax structure, though important advances were made on items such as taxpayer advocacy, ending the fiscal war, and simplifying the complex ICMS legislation. On the other hand, it totally rejected the contributions that nondeclaratory taxes could make to enhancing Brazil’s tax system. In fact, the Alternative Proposal served as a counterpoint to the reporter’s text, insofar as it introduced two important paperless taxes (the Bank transaction tax, and an excise called Selective Tax), as substitutes for several other taxes.

Both the Mussa Demes proposal and the Alternative Proposal advanced very similar diagnostics about the state of taxation in Brazil, and both sought to eliminate social contributions based on company’s gross income (PIS, Cofins,) on profits (CSLL), bank transactions tax (CPMF)), and to end the multiple taxes on circulation of goods and services (IPI, ICMS, and ISS). The big difference between the proposals, however, is that Deputy Mussa Demes encumbered a national VAT to be the hegemonic tax of the Brazilian system, whereas in the Alternative Proposal that function would befall on two paperless taxes: the Bank transaction tax and the Selective taxes.

The Alternative Proposal has the following characteristics:

1. Tax asepsis: it eliminates the IPI, the ICMS, and corporate income tax, which have high bureaucratic complexity, high evasion rates, and high operating costs. It also eliminates several social contributions that heavily pollute the current tax system – i.e., PIS, Cofins, CSLL, and the bank debit transaction tax (CPMF);

2. Personal Income tax to be levied only on high income recipients: the personal income tax will exempt incomes up to 20 minimum wages monthly, which will exclude over 90% of Brazil’s population from paying income tax;

3. Exoneration of production – by eliminating the corporate income tax (IRPJ), corporate profits, if reinvested, will not be taxed, which will stimulate production and employment. Distributed profits, however, will be taxed as individual income on the personal income tax of shareholders. Withholding income tax will be applied to all financial and capital earnings;

4. Paperless taxes: declaratory taxes eliminated by the Alternative Proposal will be replaced by non-declaratory taxes, such as the selective tax, and by the tax on bank transactions, both of which are immune to evasion and are simple and cost-effective to collect;

5. Exoneration of corporate payrolls: according to a previous proposal by Ives Gandra da Silva Martins, the employer’s portion of the INSS payment will be eliminated, replaced by the bank transaction tax.

It is important to stress that the following fears, related to the bank transaction

tax, are unfounded: a) its cumulativeness (because the tax rate will be low, and it will replace several other taxes, such as the ICMS and the employer’s contributions to the INSS); b) difficulties in zero-rating exports (which is possible by using a list of rebates prepared with the assistance of the official input-product matrices, a practice that is accepted and recommended by the World Trade Organization (WTO)); c) the impact of cumulativeness on the financial markets (given that, in the Alternative Proposal, transactions in the financial and capital markets will be exempt from the bank transaction tax); and d) a possible bank disintermediation (because the proposal provides for prohibition of endorsements and the issuance of non-personal checks payable to the bearer, in addition to requiring that all payments be processed through Brazil’s banking system, without which a transaction would lose its formal validity).

The Alternative Proposal, in addition to seeking to address the traditional requirements of efficiency and equity, makes significant strides in three essential aspects related to the redesign of the current tax system: simplicity, immunity to evasion, and low cost, both public and private. Furthermore, it broadens the universe of taxpayers, as it reaches the informal market and includes tax evaders in the taxpayers’ universe. It also underscores the rights and guarantees of taxpayers. New taxes and rate increases will require a referendum, and the use of Executive Orders (Medidas Provisórias) for tax legislation will be prohibited. Furthermore, legal ceilings will be established for existing tax rates in order to contain the government’s escalating fiscal appetite.

Finally, it should be pointed out that the impact of the bank transactions tax across economic sectors and on final consumer prices was estimated with the help the official input-output matrix. The simulations show it collects more efficiently and with less impact on final consumer prices than a VAT, as will be shown below.

On the other hand, the orthodox proposal passed in the Congressional Special Committee on Tax Reform outlined a reform model that goes in the opposite direction, and fails to tend to the most pressing needs of Brazil’s tax system. New taxes were created, rates were raised, and items that carry significant weight in costs to the productive sector were overcharged. Some elements of public spending were positively altered, albeit insufficiently.

The same report, after intense political and economic debate, was altered, but never gained enough support to be approved at the floor of the Chamber of Deputies. It is conservative and it aggravates the defects of the current system. The bill creates a conventional, paper-driven, and bureaucracy-laden VAT to jointly replace the IPI (the federal VAT on industrial products), the current state VAT (the ICMS), and social contributions. However, to raise the same revenue as the sum of the abolished taxes, the total rate of the new VAT will need to be excessively high. The services sector, for example, will see its tax burden double. This will stimulate tax evasion and avoidance.

The bill also has glaring technical flaws, such as the introduction of the “little boat” method of collecting the VAT, which, in interstate trade, will lead to the creation of systemic and certainly non-liquid credit balances against the government. And it commits the dramatically nonsensical mistake of creating new taxes, such as the Retail Sales Tax (called IVV), an underhanded compensation to municipalities that stand to lose their Services Tax (called ISS), which would be transferred to the central government in order to increase the tax base of the new VAT, and therefore stand a chance of requiring that a lower tax rate be applied.

It is important to remember the condemnation uttered by the world’s top tax experts concerning the introduction of this type of tax (retail sales tax) in countries such as Brazil. “In the case of Brazil, high administrative costs mean that retail sales are not a good base for sub national governments. The retail sales tax is an example of administrative costs ruling out a theoretically attractive alternative. The retail sales tax has been successfully used to finance both state and local governments in developed countries. The preponderance of small retail outlets with rudimentary record-keeping would make the RST very costly to administer in Brazil”.

In attempting to incorporate isolated suggestions in order to garner support, the official bill loses its conceptual consistency. It contains many details that are unusual in constitutional texts. It is out of the ordinary that, in order to remit the new VAT to the destination state, a non-mandatory constitutional text would allow for choice between different alternatives, such as the use of the “little boat” technique, or the creation of a compensation fund, or any “other procedures”.

Culminating with what could be called an anti-reform, such proposal allows for the creation of thirteen new tax species, all of which are paper-driven, technocratic, and highly evadable, for which partial compensation is offered by extinguishing only four existing taxes. In summary, the Committee demonstrated that it was incapable of producing a reasonable tax reform bill. According to Professor Ives Gandra da Silva Martins, the current tax system is a bad one, but it would become even worse if such bill were implemented.

There is no escaping the impression that the government does not really want to reform the current tax system. Former Minister Antonio Kandir said, in 1997, that tax reform is not a priority. Surprisingly, former Minister Pedro Malan asserted that only in the “next millennium” would Brazil have a new system. This confirms the huge gap that separates what the government thinks about the problem from what society wishes. The government’s tax reform bill does not profoundly modify the current structure. The country will continue to have an inefficient tax system that is unfair and that greatly induces evasion, avoidance, and the accelerated expansion of the informal economy.

Value-added taxes are difficult to administer in federal systems. Brazil is one of the few federative countries that have a state VAT, which explains its enormous complexity and its lack of administrative control. Federalization of the VAT would imply significant operational improvements. But the change would lead to further centralization, given that the current ICMS is the most important source of revenue for the States. The VAT would be collected by the federal government and shared with States and municipalities. But governors and mayors fear to lose their financial autonomy and to suffer a significant reduction in their own revenues, not to mention the exacerbation of political conditionalities which usually follows revenue sharing. In exchange, municipal governments would gain the retail sales tax, the IVV.

The operation of the IVV requires a tax ethics that does not exist in Brazil. It is obviously cultural mimicry to attempt to collect taxes at each consumer point-ofsale, as in the US. Tax evasion would be enormous and due to the need for new and costly auditing systems, its administrative costs would be considerable. Of the current ICMS revenue in the State of São Paulo, 90% comes from 1,000 companies. To collect as little as half of that amount would require monitoring of no less than 300,000 retailers throughout the state.

Summing up, the new bill is centralizing, bureaucratic, and induces heavy evasion.

In editorial, the newspaper “O Estado de S. Paulo” showed that the government, in addition, still dares, unashamedly, to propose the creation of a new fuels tax. There is talk of a “green tax” and of charging the ICMS on the use of São Paulo’s water resources. It is not surprising that taxpayers have become so discontented.

Furthermore, several experts have been calling attention to Brazil’s excessive tax burden. The weight of taxes already surpasses that of rich countries such as the United States and Japan. In recent years it has threatened to hit 40% of GNP, a level without equal among developing countries. This results in low productivity, and discourages economic activity, while stimulating tax evasion.

Tax avoidance, including evasion and the growth of the informal economy, is increasing at a frightening rate. The Federal Revenue admits that for each real collected by the public sector, another real is lost to tax evasion.

In spite of all, economic authorities have stood practically inert. On one hand,

they make disastrous reform proposals to existing tax structure. These are touch-ups that create more problems than solutions. On the other hand, the government is constantly attempting to fine-tune the system, but in an uncoordinated way, which only aggravates the complexity and inconsistency of the current structure, which has become an incomprehensible quilted patchwork of taxes and contributions.

To continue down this path will result in two undesirable facts: oppression by public bureaucracy over the formal economy, and accelerated expansion of the informal economy. Those who presently pay taxes will pay more; others, on an increasing scale, will pay less and less, or nothing at all.

The growing centralization that would result from implementing the government’s proposal can be analyzed under yet another prism. To unify the ICMS, IPI, and ISS, and at the same time to avoid loss of revenue and to enable the government to guarantee compensation for lost revenue of lost taxes by states and municipalities, would imply imposing a VAT with high rates. Revenue from these three taxes combined currently accounts for 10.5% of GDP, or 34% of Brazil’s gross tax burden. The ICMS accounts for 7.4% of GDP. If we suppose that the incidence base for the new VAT is about 20% broader than that of the ICMS, the new tax’s rate would have to be as high as 21%, to prevent losses.

If today, with old VAT rate at 17%, tax avoidance and evasion are already high, it is obvious that the reward for evasive behavior will increase in direct proportion to the increase in the nominal VAT rate resulting from the proposed tax reform bill. The government’s proposal, therefore, will inevitably exacerbate the tax system’s major operational problems: avoidance, evasion, and flight to the informal economy.


Once the effort to comprehensively reform the tax system was frustrated, defenders of tax conservatism focused their efforts on eliminating cumulative social contributions.

There are three types of social contribution in Brazil. The first, on wage earners and employers, is collected by Social Security by withholdings on payrolls. This is the most perverse of all because while it raises the cost of labor, it discourages the creation of new jobs, induces the adoption of capital intensive production techniques, and stimulates the informal job market.

The second type of social contribution, such as PIS and Cofins, were imposed on a firm’s gross revenues. Corporate segments have been arguing ferociously for their elimination, and as of 2002 they have become partially non-cumulative.

And the third type, the contribution on financial transactions, the bank debit transaction tax (CPMF), against which certain corporate sectors and parts of the government bureaucracy fight with equal vigor, because of its alleged cascading effect. In fact, after a bitter dispute in Congress, it was abolished in Brazil at the end of 2007.

The reasons why they have been arguing for the elimination of the PIS, Cofins, and the bank transactions tax (CPMF) have already been duly discussed and rebutted. We saw that it is a mistake to oppose such contributions because of their cumulative nature. One can, however, accept extinguishing the PIS and the Cofins based on the fact that they are both declaratory taxes, full of bureaucracy, and as such, susceptible to evasion.

It is interesting to note that the tax base of social contributions levied on firms’ gross revenue is approximately equal to the tax base of the CPMF.206 In other words, firms´ gross revenue or gross corporate sales is a concept quite similar to the national account concept of Gross Value of Production. Thus, the cumulative PIS/Cofins are very similar to taxes on bank transactions, such as the CPMF. The difference, however, is that the former is collected through a declaratory process based on the value of reported sales. And though it has a rate that is 9.6 times higher than the CPMF (3.65, compared to 0.38), it collects only 2.5 times as much revenue. Even if we allow for a tax base 50% smaller for the PIS/Cofins, the comparison with the bank debit transactions tax (CPMF) demonstrates that evasion of paper-driven contributions on sales is staggering.

A study by the IBGE/FGV showed similar findings. In estimating the impact of the bank transactions tax (CPMF) and of the PIS/Cofins in the various sectors of the economy, its authors noted that, “whereas the measured impact of the bank debit transaction tax (CPMF) were in the range of 10% of the measured impact caused by the use of PIS/Pasep and Cofins, in 2000 total bank transaction tax revenue was equal to nearly 30% of total revenue from PIS/Pasep and Cofins.” The origin of this discrepancy, evidently, is the lesser possibilities for evasion by the paperless, non-declaratory base of the bank transactions tax (CPMF), as compared to the paperdriven, declaratory base of the PIS/Cofins.

Therefore, the proposal to replace the PIS, Cofins, and the CPMF for a noncumulative contribution proves totally inadvisable. According to studies conducted by the Research Institute of Applied Economics, (IPEA), the elimination of those cumulative contributions would require a non-cumulative declaratory tax with a rate of about 10% (or if the financial sector is exempted, as has been suggested by some, of 11.5 %,). Therefore, if all those taxes are replaced by a unified VAT, the mere issuance of an invoice will imply a tax burden of approximately 37% on value-added (17% for ICMS, 10% for IPI, and 10% of the non-cumulative contributions).

In fact, former Secretary of the Federal Revenue, Everardo Maciel, in testimony before the Special Committee on Cumulative Taxation in the Chamber of Deputies, on 2 April 2002, stated that a change from a turnover tax system to a value-added system raised three concerns: 1) the operational change would increase tax evasion, given that the more complex the system is, the more susceptible it is to a wide range of avoidance tactics; 2) a consequence of the first concern is that the change could have repercussions in fiscal revenues; and 3) the shift would cause changes in relative prices in the economy, given that some taxpayers will see their tax burdens increase, while for others it will decrease.

But what really stands out in this debate is the insistence on the elimination of gross revenue and bank transaction taxes in contrast with the tolerance shown for excessive payroll taxes. In truth, one of the fundamental points of any tax reform bill is that it must lessen the burden on corporate payrolls.

Brazil taxes wages excessively. This explains why the population of wageearners increases very little and why the average salary is incapable of supporting permanent increases in production.

The cause of this contrast between low wages and a high tax burden on them lies in the structure of Brazil’s tax system. The government, incapable of controlling evasion in a system made up of declaratory taxes on production, seeks an easy way out to guarantee its revenues, and assigns to formal wage-earners a tax burden that is higher than in other countries. The tax on formal wage earners is one of the highest in the world. In Brazil, a monthly salary of US$ 840 is taxed at a nominal rate of 27.5%, whereas in the United States the same monthly salary is taxed at 15%.

The 8.5% rate on payrolls collected as workers indemnity fund in case of unjustified dismissals has become a quasi fiscal contribution that differs little from other taxes on wages. Additionally, INSS (social security) payments add about 35% to the payroll tax burden. It is not surprising therefore, that only half of Brazil’s work force is formally on the payroll and that the infamous “Brazilian cost differential” has become an upward spiral of inefficiency and loss of competitiveness imposed on domestic production.

The proposal to lighten the burden on payrolls by eliminating employer contributions to the INSS (the official Social Security System) could turn out to be an important stimulus for expanding the process of including the informal work force into the regular economy and for stimulating the creation of new jobs. But the major benefit is that eliminating the INSS contribution of 20% included in the tax wedge on labor would allow for an increase in real wages, without pressures on costs and prices. The resulting increase in the consumer market would stimulate aggregate demand and investment, and would make an effective contribution toward supporting further GDP growth.

It is possible to exonerate payrolls, to increase take-home wages, to reduce tax evasion, to create jobs, to reduce the “Brazilian cost differential” and to lower prices.

There is a Constitutional Amendment Bill in the Chamber of Deputies aiming at exonerating corporate payrolls by eliminating the employer social security contribution to the INSS and by replacing it with a social security tax on bank transactions. According to data of the IBGE, 95% of the supply of new jobs created in 2000 was filled by workers who had never been formal wage-earners. This fact becomes ever more common as time passes, with damaging consequences to the well-being of the workers and their families, in addition to meaning an unsustainable overload on the social security system.

Furthermore, removing taxes from corporate payrolls by eliminating the employer payment of the INSS would serve as the instrument for correcting the flagrant injustice that is committed against the services sector (highly labor intensive), should its tax burden be increased, as proposed in the bill of the Special Committee on Tax Reform. It is well known that payrolls in the services sector ranges from 40% to 70% of the value of gross sales. In this case, employer payments to the INSS of 20% to 22% on payroll mean that firms in the service sector must contribute from 8% to 15.4% of gross sales to finance the official social security system. Such peculiarities of the services sector call for corrective measures capable of relieving the high tax burden that labor-intensive activities would have to bear.

If the employers’ contributions to the INSS are replaced by the Social Tax on bank transactions at a rate of 0.6% on bank debits and credits, as is proposed by PEC No. 256/00 (a constitutional amendment bill), the social security system would collect the same revenue that the INSS presently collects from its payroll-based tax. This is merely a revenue substitution that in no way alters the destination of social security funds, including earmarked revenue for educational expenses and the socalled “S System” (used to fund employers administered programs in workers training).

The rates proposed for the Social Tax, presupposes exemption for intrabank and other financial and capital market transactions, especially stocks and bonds transacted in the securities exchanges. There would also be a need to guarantee that transactions above pre-set legislated limits would only have legal validity if processed and cleared through the country’s banking system. This would ensure that the tax base of the Social Tax would retain the same revenue potential as the bank debit transaction tax (CPMF).

The major benefits of the Social Tax and of eliminating the employer payroll payment to INSS are listed, as follows:

1. Lightening the tax burden on corporate payrolls, reducing tax burden and production costs especially in the service sectors, which are highly laborintensive;

2. Stimulating demand for labor; demand for formal jobs would also be stimulated, reducing excessive outsourcing caused by high labor costs;

3. Fighting unemployment; nowadays, unemployment and underemployment affect 20% of the economically active population in the country’s major metropolitan areas;

4. Stimulating formalization of labor relations, as the growth of informal jobs worsens the quality of labor relations; social security guarantees would be extended to all workers, and there would no longer be stimulus for hiring illegal or informal workers;

5. Allowing reduction of tax burden on the cost of labor; cost reduction would lead to lower production costs and inflation control;

6. Increasing the competitiveness of Brazilian products vis-à-vis their foreign competitors through the elimination of the INSS employer payroll payment (which cannot be exonerated in exports); exports would benefit and domestic products would find fair competitive conditions to face imported products.

Reducing labor costs could pave the way for wage increases in all sectors. It would be particularly important, and utterly possible, that wages be increased at least by the amount of the Social Tax on bank transactions paid by wage-earners, so as not to further burden after-tax wage earnings.


In order to balance the social security budget, economists are unanimous in their call for more jobs and higher economic growth. Some see a need for GDP to grow by 6% to 7% annually, in addition to the need for changes in social security legislation. But no specific solution has been proposed.

In recent months, the government, through the Finance Ministry, has spoken of exonerating companies’ payrolls from labor contributions and of finding new ways to finance social security. The objective is to decrease the cost of labor.

Presently, social security contributions amount to 36.55% of payrolls, as shown in TABLE 26. In addition to these direct charges, firms must pay indirect taxes and contributions levied on gross income and on value-added, such as ICMS, IPI, Cide, PIS, Cofins, and ISS. In 2005, firms paid R$ 36.5 billion into the INSS, and R$ 42.7 billion in 2007. Between 2000 and 2003, INSS revenue remained constant, whereas in 2004, 2005, 2006 and 2007 there was a small increase (see TABLE 22). Such revenue growth is mostly due to the formalization of jobs and to increases in the minimum wage, not necessarily to newly created jobs.


A study by the Brazilian Institute for Tax Planning places Brazil in second place, behind Denmark, in the worldwide ranking on payroll taxation (see TABLE 27). INSS contributions and other taxes levied on company payrolls directly impacts employment and wages.



In order to unburden company payrolls, the National Confederation of Services (CNS) and the Federation of Services of the State of São Paulo (Fesesp) are proposing the adoption of a new tax base for financing the INSS system. “Bank transactions” is the suggested new tax base to replace payroll. To provide technical support for the proposal, the Getulio Vargas Foundation was commissioned to conduct a study on the repercussions such a change would have on the economy.

What would be the impact on the Brazilian economy if companies were no longer required to pay the INSS payroll contribution to the government-sponsored pension funds?

This question could be put in a different way, namely, if this tax ceased to exists, would companies be able to increase investments and employment, while reducing prices? To answer this question one must first indentify a revenue source capable of generating the same amount that companies paid into the INSS. In this study, the alternative source of revenue is the bank transactions tax, and a simulation was performed to measure the impact of different bank transactions rates, in addition to the CPMF of 0.38%, and to observe the aggregate macroeconomic impacts, both on the overall economy and on each productive sector.

The study was based on the following facts:

• To reduce tax burden on payrolls, companies seek legal alternatives to making direct wage payments, such as earnings and profit sharing, distribution of transportation coupons, of meal tickets and of utilities payments, in addition to engaging in informal work contracts, such as temporary employment.

• Life expectancy has increased for Brazilians. Currently, there is only 1.8 active worker to support each retired member of the labor force, a ratio that was 10 to 1 just 40 years ago.

• Article 195 of the Constitution states that: “social security will be funded by society as a whole, through direct and indirect means...”

• In order to remain competitive in a globalized economy, businesses must reduce costs, innovate, and improve the quality of products and services.

• The legal costs associated with labor-related lawsuits must be reduced (there are currently 30 million labor-related lawsuits in Brazil’s court system). There is an urgent need for a simpler and more straightforward labor legislation, capable of providing assurances and guarantees to employers and employees

The Getulio Vargas Foundation (FGV) study, based on IBGE data up to 2006, showed that by replacing the INSS payroll tax with a bank transaction contribution, (calculated at a 0.458% rate), GDP would increase by 0.98%, the employment rate by 0.92%, and aggregate demand by 1.09%. Considering that INSS revenue, which that year amounted to R$ 32.1 billion, would remain the same, such change would also have beneficial impacts on inflation indices, with the consumer price index (IPC) dropping by 0.32% and the general price index (IGP) falling by 0.48%, as shown in TABLE 29.


In 2007, the rate of the new contribution needed to replace the present INSS payroll revenue would be 0.45%. It would have to be increased to 0.53% if additionally the Incra and the Educational Contributions were also eliminated, as shown in TABLE 30. TABLE 31 and ILLUSTRATION 7 show the results of the study commissioned by the National Services Confederation to the Getulio Vargas Foundation, on the effects of the elimination of the INSS payroll contribution and its replacement by a bank transactions tax on growth rates for various sectors of the economy, and the decrease in their respective tax burdens.

It is worth mentioning that the CPMF (a bank transactions tax), which caused so much controversy in Brazil, was the result of academic research made by Prof. Marcos Cintra, vice president of the Getulio Vargas Foundation. But, rather than instituting Cintra’s innovative proposal, which called for a single tax to replace all other taxes, the CPMF became, in effect, an addition to the current tax burden. Such deviation created fierce opposition, such as by the late Senator Roberto Campos, who said: “The simplifying methodology of the single tax was undermined by the fact that the government, on two occasions - through the IPMF (1993) and the CPMF (1996) - applied the automatic components of the new methodology, while failing to apply its simplifying ‘ideology’…it is a sophisticated instrument that has become brutish through misuse, as if it were a fencing sword used for cutting grass.”


On the other hand, the National Confederation of Industry (CNI), in a recent report, stated: “the CPMF is a cumulative tax that distorts the allocation of resources and raises the costs of transactions and of bank intermediation in the economy, in addition to the fact that it is almost impossible to calculate the portion of the CPMF in a product’s final cost.  In summary, from an economic standpoint it is a poor-quality tax and a pernicious one when it comes to efficiently allocating resources and investment.” It is our belief that such statement reflects deep-rooted prejudice rather than an accurate technical analysis of the matter, as was extensively shown in various sections of this text.

A common argument used against the CPMF is that, with high rates, there is an incentive for commercial payments and transactions to be carried out outside the banking system, causing the economy to regress to a prehistoric system based on barter and on cash trade. However, it is important to recall that Brazil has the most technologically advanced banking system in the world, and that practically all commercial transactions - transfers, tax and fee payments, etc. - are carried out through its digital systems.  Therefore, the Central Bank and the Internal Revenue Service have adequate instruments to detect and deter attempts to evade the CPMF tax. The Internal Revenue Service, under former Secretary Everardo Maciel, used this tax (the CPMF) as a tool for controlling tax evasion. The ease with which bank transaction information is cross-referenced with other statistics available to the government led to significant improvements in the tax-collecting apparatus.


Furthermore, it is highly unlikely that in the age of the Internet, of digital credit cards, and of every other sort of financial instruments to support the exchange of goods and services, there could be a regression to barter economy, given that the costs of conducting business outside the banking system would be far greater than the benefit of evading a transaction tax.

The proposed replacement of the INSS payroll tax with a CMF contribution would have countless advantages. INSS income would not depend on the evolution of the rates of employment since the current CPMF has proven that its revenue is stable relative to national income and product levels. It is important to recall that, with the increase in life expectancy of Brazilians, there is a decreasing number of active workers supporting present retirement benefits. As such, the INSS go easily go under if the system that funds social security continues to be based on corporate payrolls.

Opposition to the creation of a new INSS bank transaction contribution could possibly come from the labor sector, since it is an across-the-board tax, that is, it would be paid by any individuals and corporations that conduct banking transactions, and by active and retired workers alike. However, according to the proposal, such new tax would be paid entirely by the employer, who would add to active worker’s salaries the amount they would have to pay on account of the new social contribution, thus exempting wage earners from it.

The use of such new contribution would have countless advantages, such as making evasion more difficult, reducing the number of labor-related lawsuits, and spreading the incidence of INSS payments over the whole of society. Modern labor saving methods of production, which increase productivity but concomitantly may increase unemployment, would not be held responsible for reducing INSS revenue.

The CNS commissioned a public opinion poll in nine of the country’s capital cities, in order to evaluate the proposal and its repercussions among the population. The poll asked whether the respondent agreed, or not, to the following concept:

“There is a proposal to end the INSS payroll tax for businesses. For this to happen the CPMF (present bank transaction tax) would increase from 0.38% to 0.88%, but this increase would be reimbursed by businesses to their employees. With this change, studies showed that there is a tendency for product prices to fall and for employment to increase.” The results were overwhelmingly favorable to the proposal: 64% agreed, 25% disagreed, and 11% were indifferent or would not answer.



There are several bills in Congress that propose the adoption of non-declaratory taxes as a basis for tax reform. In particular, I have introduced two bills: PL 4722/01 proposes to exonerate Brazilian exports from the PIS/Pasep, the Cofins, and from bank transactions tax (CPMF), and PLC 190/01 that proposes to tax imports with those same taxes, thus giving equal tax treatment for domestic or imported production. Both bills propose the use of the input-product matrix as the mechanism for calculating tax rates either for exonerating exports or for taxing imports.

There are other bills before Congress that deserve to be mentioned and that should be discussed as alternatives to the complex current system. One of these is PEC 47/99, which I authored, presented to the Special Committee on Tax Reform. It creates the Single Tax gradually, through offsets to other taxes, and extinguishes several other inefficient and complex forms of taxation in use in Brazil. Another bill is PEC 183/99, also called the Alternative Proposal, which creates the bank transaction tax and the selective (excise) taxes. Also PL 256/00, which I introduced together with other deputies, which creates the Social Tax on bank transactions to replace the employers’ contribution to the INSS (social security). Finally, PEC 474/01, should be mentioned, which I and others authored and that introduces the Single Federal Tax and incorporates the knowledge and experience acquired over years of observation and research on the Single Tax proposal in Brazil.

Constitutional amendment (PEC 228/04) authored by deputy Luiz Carlos Hauly, proposes a significant simplification of the tax system. It includes a tax structure made up of a progressive income tax, a tax on financial transactions net of social security contributions, and an excise tax on alcoholic beverages, electricity, communication services, fuels, vehicles, tires, auto-parts, electronic products, home appliances and equipment, sanitation services and firearms.

There was a general feeling of frustration when it was realized that the reform proposal endorsed by the Special Committee on Tax Reform in 1999 was nothing more than a timid and conventional attempt to correct some isolated problems in Brazil’s tax system. Furthermore, it failed to ignite public opinion or to move forward in the urgent need to simplify and universalize the tax collection system for the country.

In contrast, the Federal Single Tax bill (PEC 474/2001), more fully analyzed in earlier chapters of this text, seeks to implement a new and revolutionary tax system in Brazil.

As a first step, it proposes to implement the single tax only at the federal level (called FST), replacing several federal taxes with just one tax on bank transactions. Next, the proposal calls for a popular referendum in order to include interested states and municipalities into this same tax format.

The FST is an innovative and revolutionary tax system that will provide extreme simplification to the structure of taxes in Brazil. Its implementation will lead to a steep drop in tax collection costs to the government and to private agents. Tax evasion, avoidance, and corruption will be significantly reduced, making the system fair and more efficient.

The idea of the FST is simple: a 1.7% tax on each credit and debit transaction performed in the banking system. Federal taxes will be extinguished (IRPF, IRPJ, CSLL, IPI, Cofins, CPMF, social security payments to the INSS, IOF, ITR, and all types of withholdings). The only taxes that will remain in place will be the FST, some extra-fiscal taxes (instruments for regulating economic activities, such as foreign trade taxes), and user fees. Criteria for revenue sharing among the various levels of government will not be changed, and actual transfers will be automatically performed using software to be developed specifically for this purpose. Taxation in the financial and capital markets will be deferred, avoiding cumulative taxation of financial turnover and capital transfers. The value of the principal in any financial transaction will be immune to the FST for as long as it remains within the financial circuit and is not transferred to bank cash deposits. FST will have the effect of redistributing the tax burden, introducing greater social justice, and relieving the excessive tax incidence on wage-earners, on the middle class, and on organized businesses, which today bear an abusive tax burden in Brazil.

For 2007, the tax rates must be recalculated. The goal of the FST is to ensure the same revenue as currently collected, about R$ 396 billion at the federal level. Simulations as show in TABLE 32 that a 2.072% rate on debits and 2.072% on credits for each bank transaction would be sufficient to raise revenue equal to that generated by the taxes that will be eliminated.


The FST model would eliminate all revenue raising taxes (fiscal taxes), which account for more than 60% of current federal revenue. Extra-fiscal obligations such as the FGTS, PIS/Pasep, taxes on foreign trade, social security for civil servants and employer social contributions will remain unchanged.

There are several advantages to the FST: it reduces the individual tax burden; it simplifies the current tax system; it reduces administrative costs to the government, to social security, and to states and municipalities by making the fiscal machinery leaner, as well as reducing compliance costs to businesses by no longer requiring paper returns, judicial actions, and dispensing with tax planning and consultancy activities; it stimulates greater productivity and profits; it increases real and nominal salaries; it reduces “Brazilian cost differential”; it is universal – no one would easily evade it, nor would anyone be exempt from the tax; it is transparent and impersonal; it is equitable – by being evasion-proof and proportional to each citizen’s earnings; and it would put an end to corruption.

On the other hand, criticisms of the FST were raised by opponents of the proposal. The only criticism that still remains partially unanswered refers to its impact on relative prices, and to its distortionary effects on allocative efficiency.

The FST, despite being cumulative, causes less distortion in relative prices than a VAT type tax, as our simulations have shown. In addition, it has less impact on costs. According to estimates in TABLE 33 the tax burden of the FST on product prices reaches a maximum of 15.34%, whereas incidence of only two taxes, the IPI and the INSS, would amount to 36.06% of consumer prices. This comparison becomes even more dramatic when one sees that the FST collects 15.25% of GDP, whereas the other taxes will have stronger impact on final prices, but will collect only 2.92% of GDP.

The FST proposal, if implemented, would have important positive impacts on the economy:

• In the labor market, the FST will stimulate the creation of new jobs and increased labor demand, by eliminating payroll taxes;

• In the consumer market, the FST will make prices fall as a result of the lower tax burden on final prices; furthermore, elimination of payroll taxes will increase the purchasing power of wage earners;

• For businesses, the FST will reduce cost of production, stimulate sales and increase investment in machinery and equipment, expanding productive capacity;

• In the public sector, the FST will encourage a shift of emphasis from tax auditing (which would become unnecessary as far as the individual taxpayers are concerned), to the monitoring and auditing of the public sector itself, which is the source of major scandals, inefficiencies, and focal points of corruption;

• Resources that are currently spent on compliance costs and on public costs related to auditing and collecting revenue will be significantly reduced;

• For tax purposes, the boundaries between the formal and the informal economy will disappear.

• For exports, the use of rebates based on physical observations of shipment/transportation of goods or services should provide a more efficient system of exonerating sales to foreigners than is actually practiced in Brazil.


Summarizing, the FST can be the basis for a broad tax reform agreement. It is not an easy task to accommodate the interests of the major social groups involved in the issue, such as workers, business, individual tax payers, and the government. Each group wants to take the opportunity to tend to their own interests, configuring a conflict of interests that is impossible for a conventional tax reform to overcome.

The FST, by allowing gains for all parties involved – the public sector, wageearners, and business owners – creates conditions for a productive dialogue on tax reform that is long overdue in Brazil. For the public sector, the FST allows for reduction of operational costs, dismantling of bureaucracy, furthering of administrative modernization, and increased efficiency in revenue collection. It facilitates necessary fiscal adjustment. For workers, it is a new opportunity for increases in real wages by transferring, even if partially, social security and tax withholdings expenditures into salaries. And for the business community, it allows for reduced costs, increased markets, and higher profit margins. The only losers will be tax evaders and to a lesser extent, the underground economy.




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