Middle brackets of the wealthy will pay lion’s share of tax increase

The tax authority mapped the income positions of more than 141,000 taxpayers who will be impacted by the government’s proposal to tax high incomes to offset the income tax exemption for individuals earning up to R$5,000 monthly. The plan is to establish a minimum income tax for those earning above R$600,000 annually.

According to the Federal Revenue Service’s data, based on 2022 figures, three taxpayers declared incomes of R$1 billion or more that year, paying an average of 5.54% in income tax. Meanwhile, the seven taxpayers with incomes between R$500 million and R$750 million paid 2.77%. Taxpayers affected by the minimum tax were divided into 25 brackets. Across all brackets, there is a projection of R$25.2 billion in revenue by 2026, matching the estimated tax waiver for the middle class exemption.

Some experts argue that the rates for the wealthiest demonstrate how minimally progressive Brazil’s income tax system is, considering that high earners use tax-exempt instruments.

Others caution that the data should be evaluated carefully, as it does not reflect the taxation that occurs within the companies of which high-income individuals are partners. This is anticipated to be a contentious issue in Congress, in a project reported in the Chamber by former speaker Arthur Lira (Progressive Party, PP, of Alagoas).

According to the Revenue’s calculations, raising the rate to 10% for taxpayers with incomes over R$750 million annually, as proposed, would generate less than R$500 million in revenue per year, given the few billionaires within this income bracket.

The highest annual revenue, according to the Revenue Service, would come from taxpayers earning between R$1.8 million and R$2.4 million annually, the group most affected by the new taxation. For them, the additional tax would generate R$3 billion in revenue.

Additional revenue will also come from a 10% withholding on dividends for those receiving up to R$50,000 per month per company for Brazilian investors, compared to the same withholding for non-residents, regardless of the amount received.

The National Treasury’s main argument in favor of the bill, according to discussions with secretaries who developed the proposal, is to demonstrate that the majority of the contributing population pays income tax at a rate between 7.5% and 27.5%, while the average rate for the 141,000 high-income individuals affected by the proposal is 2.54%.

Members of the department say that because the proposal increases progressivity, the compensatory measure will be fully defended in its presentation to the National Congress. There is room for “marginal adjustments,” according to a source, but without diluting or even replacing the high-income tax.

Unlike other bills drafted by the National Treasury in recent years, the economic team believes there are few arguments for altering the compensatory measure. When contacted through its press office, the department declined to comment.

Moreover, the proposal has popular support. A survey by the Datafolha institute published earlier this month showed that 76% of the population supports the high-income tax as outlined in the project.

“It’s very hard to oppose making a millionaire pay the same as a nurse,” told Valor earlier this month Marcos Pinto, Secretary of Economic Reforms at the National Treasury and one of the proposal’s architects.

To avoid double taxation with dividend taxation, given that the legal entity has already paid income tax, the government devised a calculation that will add the average rate of the individual with that of the legal entity. If this sum is below 34%, the individual must supplement the tax to reach this level. If it exceeds, the withheld dividend will be refunded.

“The data underpinning the proposal reveal the lack of fiscal justice and progressivity in our personal income tax system, and the idea of a minimum tax aligns with the principles of tax justice and contributive capacity,” assessed Lina Santin, a researcher at the FGV’s Fiscal Studies Center.

According to her, despite some necessary improvements, “any project that seeks to attribute greater progressivity to income taxation by focusing on a minimum tax at the top of the pyramid is indeed fulfilling and adhering to these constitutional principles, aiming to reduce inequalities.”

“I think we need to contextualize the numbers a bit because these people have already paid on the corporate side,” countered Adriano Subirá, a Federal Revenue auditor currently working for the Chamber of Deputies.

A point raised by lawmakers is that the minimum income tax to be collected from high-income individuals will be calculated based on what was paid through the company, considering that corporate taxation is 34%. “But that’s not the effective rate paid by companies,” the auditor notes. In practice, they collect something like 22% to 25% in income tax. Thus, the reference should be 25%, he opined.

Another factor to consider, the expert said, is that corporate taxation often falls below 34% due to accounting loss deductions and other adjustments. “These may reduce the effective tax, but it doesn’t mean the person is undertaxed.” This should also be considered, he evaluated.

The bill probably will go through some changes in taxation rates for the wealthiest, but not in the new exemption bracket. Mr. Subirá says the sentiment in Congress is that the bill has support from about 60% of lawmakers. There are those opposed, but they are weighing the political cost of opposing it.

Revenue figures show that the cost of increasing the exemption bracket will be borne by the middle-income brackets between the wealthiest, the auditor observed. Those at the top of the income scale will find legal ways to circumvent the tax increase, such as reducing dividend distributions.

“It’s natural that there’s greater potential for revenue in the bracket between R$1.2 million and R$3.6 million because there are many more people in this income range,” commented economist Sergio Gobetti, a researcher at the Institute for Applied Economic Research (Ipea). “Billionaires or ultramillionaires are a minority and may pay individually high amounts, but collectively they represent little.”

This is one reason why the start of the minimum tax shouldn’t be extended to the R$1.8 million bracket, as proposed by the PP, he commented. “Much less with a rate of only 4%,” he added.