Opinion: Three “neat, plausible” solutions to finance Brazil’s emergency aid

Ribeirão Preto, SP – (Opinion) As Brazil’s Executive and Legislative branches debate how much to give to needy citizens, and for how long, the question that no one wants to answer is, “How will we (meaning those of us who pay taxes) finance it?”

Cash payments are popular with voters, and politicians depend on votes to continue in office. President Bolsonaro’s determination to run for re-election in 2022 has forced him to abandon most of his campaign pledges: most notably, his commitment never to engage in the “old politics” where corrupt politicians favor each other’s pet projects in return for lining their own pockets.

After two years of incompetence – no reforms, no empathy, no vaccines – Bolsonaro has turned to the Centrão for succor. The Centrão is a bloc of conservative congressional members, largely wealthy entrepreneurs and professionals, who have long held sway over Brazil’s government. It is the latest embodiment of the “old politics”, a déjà-vu of the Congressional reality denounced by then presidential candidate Lula in September 1993: “There is a majority of 300 scoundrels who defend only their own interests.”

The newly elected presidents of the chambers of Congress, who control their respective houses’ voting agendas, are both Centrão stalwarts, allied with Bolsonaro. The Centrão has enough votes to pass almost any measure its members agree upon, even constitutional amendments.

When it comes to the thorny question of emergency aid, however, the Centrão leadership has bailed out, offering no suggestions, while demanding the Economy Minister come up with something – anything at all – as long as it does not hurt their chances of being elected in 2022.

America’s original Curmudgeon, H.L. Mencken, famously wrote: “There is always a well-known solution to every human problem – neat, plausible and wrong.”

Bearing this in mind, we offer below three well-known “neat, plausible” solutions to the human problem of financing emergency aid; we will conclude by explaining why these solutions are doomed to failure.

1) Reinstitute the CPMF tax. From 1997 to 2007, all payments or withdrawals from financial accounts were subject to a small (0.38%) tax, which financial institutions automatically deducted from account holders and paid over to the federal treasury. Administratively, the CPMF is perfection – it costs nothing to enforce and is impossible to evade. Ethically, it reaches even ill-gotten gains from “old politics” machinations and “off books” businesses.

2) Inaugurate the “tax on large fortunes”. Article 153–VII of the 1988 Federal Constitution specifically provides for the imposition of a tax on large fortunes, by a “complementary law” requiring the vote of an absolute majority of all members of Congress – which just happens to be 298 – 41 senators and 257 deputies. The most recent bill submitted to Congress defined “large fortune” as net worth over R$2 million, with a top tax rate of 5% on any fortune exceeding R$50 million.

3) Initiate the taxation of dividends. Brazil is almost alone, among large-economy world countries, in not taxing income in the form of dividends or profit distributions received by owners from their businesses. This helps explain why the number of micro-, small- and medium-sized businesses has proliferated in Brazil – salaried employees and self-employed individuals pay high taxes; owners of businesses do not. More importantly, it is also the main driver for the mushrooming number of Brazilians who have accumulated large [untaxed] fortunes.

Why are these well-known neat, plausible solutions “wrong” for the Centrão?

1) The CPMF is anathema to business owners where supply chains are long, as it cumulatively burdens all transactions in the chain. Progressives also disapprove, because it is regressive – both rich (who can afford it) and poor (who cannot) pay the same rate.

2) The tax on large fortunes would directly affect all 300 Scoundrels, not to mention countless Brazilian federal, state and municipal legislators, most of whom are high-net-worth individuals dedicated to fiercely defending their own private interests.

3) Taxing dividends would admittedly affect small businesses; crucially, however, it would kill the goose that has been laying golden eggs for the 300 Scoundrels, most of whom have become high-net-worth individuals as a direct result of owning businesses that have paid them tax-free dividends.

No one knows what the 300 Scoundrels who make up the Centrão will eventually approve. What we do know is that it will not be a “well-known neat, plausible” solution.