Income tax: Lula’s move affects more than meets the eye – 10/12/2024 – Vinicius Torres Freire

The government of President Luiz Inacio Lula da Silva intends to offset the loss of revenue through an exemption from personal income tax for those earning up to R$5,000 by imposing more taxes on those earning more than R$1 million a year, it has been revealed. In this Bound. The exemption is a promise from Lula in 2022. Maybe it will become a bill next year or in 2026. Maybe.

We only have a very vague idea of ​​what the exemption and fees are, who they will apply to and what type of income. We will discuss this later in this text.

First, the intention not to lose revenue is the minimum reasonable expectation. The federal government has and will run a primary deficit for many years, unable to even cover its basic expenses, let alone pay its interest bill (which is financed with more debt).

Given the extent of the damage, why not impose taxes on the rich only, without exceptions, in order to correct the alarming situation in public accounts? The government doesn’t want that: it says it will not increase the internal rate of return to cover the deficit.

Secondly, passing a tax exemption law is easier than increasing taxes. After the law was passed, it is difficult to collect the higher tax, for various reasons. Changing taxes changes the behavior of taxpayers, who try to escape the tax like poachers – and this is not about evasion.

Third, what does an income of R $ 5,000 mean? Suppose it is income from work (salary or not). According to Pnad-IBGE data for 2023, 90% of usual monthly income from work was no more than R$5,603.

According to data from the Federal Revenue Service, of the 38.4 million taxpayers who filed a return in 2022, about 64% had a total taxable income of up to R $ 60,000 per year (the proportion varies somewhat, depending on the concept of taxable income ).

The numbers indicate that the country is poor; And that with Lula’s change, fewer people will pay income tax. On the other hand, taxes are naturally regressive, and the rich pay very little.

Fourth, we do not know the reform model. Anyone earning up to R$5,000 per month will be exempt. Are you using the same current exemption calculation criteria? Suppose so. Will those who earn more than R$5,000 be exempt from income tax for part of their income up to R$5,000? The government says no, in order to contain the cost of change and not benefit the wealthier people to some extent. But it is not known what the schedule of exemptions or rates is.

If there is no exemption for part of income up to R$5,000, there will be a big jump in tax for those who earn up to R$5,000 and those who do not earn much more. This doesn’t make sense – the IRS clearly knows that. However, without knowing the changes in exemptions and/or tax rates for those earning more than R$5,000, it is not possible to consider the cost and fairness of the change.

Fifth, what income will be subject to tax? Will anything change in types and prices? The question is more relevant in the case of the rich. Depending on what will remain exempt or not, the size of the bill and the change in taxpayer behavior may be greater or less.

Given the uncertainty, calculations of the cost of the exemption are crazy. We have no idea about the schedule of exemptions, prices and taxes that will be charged. This is also why the exemption calculations range from R$35 billion to R$100 billion, which is an indication that we know nothing.

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