Measure could work as a counterpoint to salary readjustments in the states and to contain inflation
02/01/2022
Part of the Economy minister Paulo Guedes’ agenda, the elimination of the Industrialized Products Tax (IPI) on all products, except cigarettes and alcoholic drinks, returned to the discussions of the economic team. This time, it came to be examined as a potential counterpoint to the plans of some governors to grant salary hikes to the civil service and also as a measure to help contain inflation.
According to a person close to Mr. Guedes, this would be a structural reduction in prices in general. Possibly, adds this source, it would have a more lasting effect on inflation than a cut in fuel taxes, easily outweighed by a rise in the price of barrel of oil or an appreciated dollar against the real. For people close to the economic area, however, the opinion of president Jair Bolsonaro on this alternative is not yet clear.
The discussion takes place amid Bolsonaro’s signal that he will send a proposal for a constitutional amendment (PEC) to Congress that allows for the reduction of federal and state taxes levied on fuel and energy. The idea, however, already faces resistance from governors and depends on congressional approval.
IPI is not levied on these items. It is charged on industrialized products, from automobiles to food. In addition, it would be reduced by decree. It would not depend on approval by the Legislature, nor would there be any risk of the proposal being modified and receiving additions that are foreign to its objective, turning into a “Christmas tree” bill.
A reduction of the IPI would affect the plans of governors and mayors to increase spending because 50% of the income from this tax and from the Income Tax are transferred to states and municipalities through Participation Funds. In January alone, the transfers came close to R$19 billion.
In the opinion of a person close to Mr. Guedes, cutting part of this revenue would be a signal for the governors to hold back salary increases. The minister has warned about this, although the president himself has promised readjustments to civil servants in the area of public security, his electoral base, and to raise the salary floor for teachers.
Unlike the elimination of taxes on fuel, a general cut in the IPI would not go against the requirement of the Fiscal Responsibility Law (LRF) of adopting measures to compensate for the loss of revenue, says the economic area source.
This interpretation is confirmed by the Senate analyst and specialist in public accounts Leonardo Ribeiro. “The rule in Article 14 [of the LRF] does not require compensation if the reduction in rates is of a general nature, without differential treatment,” he said.
The effect on prices, however, is uncertain, warns Juliana Damasceno, economist with Tendências and researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV). This is because there is no way to assure that the cut in the IPI will be passed on to the consumer.
In the economist’s view, companies may not reduce their prices because they understand that a tax cut at a critical moment in public accounts is not sustainable and will turn into a new high in taxes in the future.
Speaking about fuel, specifically, she said that the prices charged today by Petrobras are already out of step with the international prices. Even so, there is enormous pressure on prices. “The source of the problem is not being attacked,” she said. Reducing taxes, as the president wants, will have little effect on fuel prices, given the way they are defined.
The reduction of fuel taxes, if it happens, will be restricted to the federal sphere, commented the chief economist at MB Associados, Sergio Vale. States will hardly reduce sales tax ICMS.
Source: Valor International
https://valorinternational.globo.com