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Three questions about the CPMF

Written by Armando Castelar.

Tiradentes, Brazil’s national hero, was executed and had his dead body cut into pieces by the Portuguese crown for opposing a hike in taxes. The year was 1792. Fast forward 223 years and Brazil is again divided over a government’s attempt to further raise the tax burden. The government wants to implement a new tax, the CPMF, of 0.2%, on top of all financial transactions. The government estimates the CPMF can generate R$ 32 billion in revenues per year.

Congress is discussing whether to approve the constitutional amendment creating the CPMF. The issue has generated a heated debate in the press and among economists. Some see it as the least bad option to fix the chaotic situation of the public sector accounts (see here). That is also the government’s view (see here). Yet, three questions about the CPMF linger without answer:

     ·  The government argues that it is near its limit on what it can discretionarily cut in primary expenditures (all but financial expenses), citing the earmarking of revenues to specific areas or programs as the key restraint. But if the constitution can be changed to raise taxes, why not change it to undo the earmarking and cut inefficient government expenditures?

      ·  Why not fix the budget by cutting financial expenses the government controls? So far the government has spent R$ 102 billion to benefit firms unhedged against the exchange rate devaluation. The 2016 budget foresees expenditures of R$ 38 billion on interest subsidies to firms borrowing on one of the credit programs extended by the national development bank. Other credit subsidies to agriculture, industry and construction will consume even more. Considering that Brazil already has a very large state, the size of which has expanded dramatically over the last three decades, why not seize the opportunity to cut back on some of these financial subsidy programs?

   · How can one be sure that even with the CPMF there will not be another fiscal crisis in a couple years? The government talks about the rise in taxes as providing a bridge, but it doesn’t say what is on the other side of the bridge. Public sector expenditures have risen continuously over the years, lately on account of rising subsidies and social security expenditures, but nothing is being proposed to stop that process. Moreover, former president Lula, who carries enormous influence over the government and will be a presidential candidate in 2018, has repeatedly spoken against the fiscal adjustment and in favor of expanding public sector expenditures. What certainty can there be that the CPMF collections will not be squandered in another binge of inefficient spending?

As the death of Tiradentes, a dentist and army officer, illustrates, the debate over taxes is seldom a technical matter, but one that hinges on the nature of the society and economic model we want. Yet, so much taxpayer money is wasted on inefficient and regressive government programs, that the case for further raising taxes is weak also on technical grounds. Brazil already has one of the largest tax burdens in the world, higher than the OECD average. It has not served Brazil well, either in generating growth, offering appropriate public services or improving income distribution (see here). Something has to be done to cut the budget deficit, but creating yet another tax is not the best option.

 

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