This paper examines the political and political economy factors explaining Brazil’s success in raising tax revenue and assesses its contribution to a Brazilian ‘Development Model’. The recent rise in tax/GDP ratio in Brazil raises several intriguing questions.
First, there is substantive macroeconomic and fiscal policy continuity since the mid-1990s, with fiscal stability sustained through the Cardoso and Lula governments. This continuity extends to tax policy. There are few significant changes in the tax code able to explain the rapid rise in the tax burden. Second, the rise in the tax burden in Brazil has not changed the distributional neutrality of the tax system taken as a whole. The rise in the tax/GDP ratio has made little or no contribution to the reduction in poverty and inequality in the country, except through enhancing the distributive capacity of government. Third, until recently tax policy had not attracted much public attention.
The paper argues that Brazil’s tax revenue outcomes are best studied from a political and political economy perspective. The absence of ‘big bang’ reforms to the tax code and tax administration suggests that policy models are less directly relevant to explaining the rise in the tax/GDP ratio. The paper makes the argument that public consent to the hike in taxes is explained by a combination of democratisation, strong preferences for redistribution, fiscally responsible centre-left coalitions, and bureaucratic capacity. New political incentives under democracy combined with high state capacity and a powerful presidency with the political resource necessary to pass an agenda of social reforms to sustain this new equilibrium.
It argues that the rise in the tax burden was made possible by and it is a reflection of the renewal of the social contract in Brazil. The politics and political economy of redistribution provide a conceptual framework to make sense of Brazil’s improvement in public finances. This approach can also explain the growing interest in tax and tax policy and could perhaps signal new tensions and boundaries in the social contract.
Key Findings:
- The significance of rising tax revenues for Brazil’s inclusive growth is huge, but it has not been consistently acknowledged. Brazil’s inclusive growth in this century, combining economic growth leading to large and sustained reductions in poverty and inequality is at the core of a hypothesised new Brazilian ‘Development Model’.
- Economic growth and the rise in the tax/GDP ratio in Brazil have enabled successive governments to expand inclusive social policies without the need to reallocate resources from existing programmes and therefore avoid damaging conflict. An enhanced fiscal space has enabled social policy activism without undermining pre-existing entitlements.
- The rise in tax/GDP ratio is not a win-win strategy when the rising burden on taxpayers is considered, a fact which is gaining prominence in domestic policy debates. To date the government have been successful in preventing resistance from taxpayers. A key issue to consider is whether growing attention to the tax burden could threaten the sustainability of an inclusive growth strategy.
- Brazil’s early introduction of VAT, which established a strong indirect tax base, suggests a route to circumventing the political pressures arising from social policy expansion financed primarily from direct taxation. Brazil appears to have managed a financing mix for social policy that avoids the limits experienced by social democratic parties in a European context.
- Brazil has enjoyed favourable conditions for the early emergence of an effective tax system. As discussed above, a relatively closed economy and the absence of substantive mineral resources forced elites to engage with potential taxpayers and to set in place an effective tax administration.