“Public Corruption” versus “Private Corruption” -

“Public Corruption” versus “Private Corruption”

09/01/2022

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By JOÃO CARLOS LOEBENS*

Corruption as the biggest problem in Brazil is one of the many myths of the fiscal context that circulate freely and strongly in the imagination of a large part of the Brazilian population.

Is corruption the biggest problem in Brazil? It is common to hear an affirmative answer to this question in conversation circles. What would be the rationale? When an assertion lacks substantiation, it is a myth.^[I], comparable to religious dogmas of faith. Could this statement (Corruption is Brazil's biggest problem!) be a myth? In this sense, we will look for elements to support an evaluation.

To assess this issue, we need 3 elements: define what we mean by corruption (delimit the scope), seek value estimates for corruption (for purposes of greater/minor comparison), and point out/compare with another problem (the one with a lower value ).

Concisely, in the fiscal scope we can define corruption as the diversion of public resources. Because it is a diversion, we need to take into account the path that public resources take, in order to cover the different moments or stages where public resources are or can be diverted.

Let's use a practical example to facilitate the explanation. A person goes to a store and buys a cell phone for R$ 1.000,00. This amount includes consumption taxes (ICMS, IPI, COFINS, etc.), which hypothetically can be defined as R$ 200,00.

The person (consumer) who bought the cell phone paid BRL 800,00 for the device and BRL 200,00 of taxes, and these BRL 200,00 were delivered to the shopkeeper (legal entity), and this shopkeeper must deposit these BRL $200,00 in the State account at the end of the month. That is, this shopkeeper has R$ 200,00 of public resources in his company's cash until he deposits them in the State's account.

After the month, the shopkeeper deposits R$ 200,00 in the State account, at which point public managers use this money to pay for different public services, such as salaries for teachers, police officers, pensions, basically for individuals. , or public works, such as roads, or even tax benefits, basically for legal entities.

In this sense, and in order to meet the present assessment of the diversion of public resources, it is important to highlight two flows:

1 – the first flow, where public resources circulate from the taxpayer to the State cash (individuals and mainly legal entities), and

2 – the second flow, where public resources circulate from the State cash to public service providers or final beneficiaries (also legal entities and individuals).

It is in these two flows that deviations of public resources occur. In the first flow, using the example described above, the shopkeeper, instead of depositing the R$ 200,00 in the State account, diverts this public resource to his company, for his own benefit. In the second flow, after the R$ 200,00 reais have entered the State's cash, the public agent diverts this resource for his own benefit in the form of overpriced work, for example.

Despite the fact that, in both situations, it is a matter of diversion of the same public resources, the “market” (or who would it be?), with the consent of economists, gave different names to these deviations. When public resources are diverted in the second flow (after having entered the State's cash), it is called corruption. When public resources are diverted in the first flow (before entering the State's cash), it is called evasion. Regardless of the reasons that underlie this differentiation in the nomenclature, it appears that, in practice, this differentiation creates in people's imagination the impression or conviction that private corruption does not exist.

I would say that this decision to give different names to the same misuse of public resources makes it difficult to understand the phenomenon of corruption, which is why, and in order to facilitate understanding, I suggest the adoption of the following nomenclature:

1 - "Public Corruption" for the diversion of public resources that occurred after the inflow of funds into the State's cash, and

2 - "Private Corruption" for the diversion of public resources that occurred before of the inflow of funds into the State's cash register.

Having overcome the stage of defining what we understand by corruption, let us move on to the second stage, the search for estimates of corruption values in Brazil. It is obvious that it is difficult to measure corruption, but there are works in this direction that help to base a better understanding of the issue.

For public corruption, for example, in the article “Corruption is not the main drain of public money in Brazil”, based on a study by economist Claudio Frischtak on overpricing in infrastructure works, it is concluded: “If we divide the highest value by the 45 years surveyed, it gives an average of R$ 6,66 billion per year".^[ii]For comparison purposes, even knowing that infrastructure works are known as the main form of diversion of public resources, let's multiply the value presented by 10, estimating the deviations of public resources after entering the State cash at 60 billion/year.

on the side of private corruption, the most relevant study is carried out by SINPROFAZ, known as Sonegômetro, which estimates annual tax evasion in Brazil (private corruption) at values close to 600 billion reais per year.^[iii]

Thus, the annual value of public corruption would be R$60 billion and the annual value of private corruption would be R$600 billion. At this point, a final macro comparison is in order: how much do these deviations of public resources represent in the country's total revenue, added up by the three levels of government? The Brazilian Tax Load is around 33% of GDP (R$ 6 trillion x 33%), approximately 2 trillion reais. Comparing public corruption (BRL 60 billion) and private corruption (evasion – BRL 600 billion) with total revenue (BRL 2.000 billion), it appears that public corruption represents approximately 3% of total revenue and corruption private sector accounts for approximately 30% of Brazil's total collection.

In other words, if public and private corruption were eliminated (it is known that in practice this is impossible – all countries have some level of corruption) the total collection would increase from 2.000 billion to 2.600 billion/year (the R$ 60 billions of public corruption have already been raised – would not increase total revenue – would be appropriately spent).

Considering only the elimination of public corruption, practically the only one attacked in the media, R$ 60 billion of the R$ 2.000 billion collected annually (3%) would be appropriately applied, which, in the words of the author of the article quoted above, “ would not bring greater balance to public accounts, or be a relevant source for new public needs or better coverage of social demands', so that, “contrary to what inhabits the popular imagination, it is not enough to return what was 'stolen' to meet to the urgencies of the poorest population in the country”. However, if the share of private corruption is added (evasion – R$ 600 billion – 30%), this picture presents a significant change with the power to influence in a relevant way the balance of public accounts.

In conclusion: within the scope of the commonly used nomenclature, the diversion of public resources represented by the problem of tax evasion (600 billion) is 10 times greater than the problem of corruption (60 billion). The answer to the initial question is: Corruption is NOT Brazil's biggest problem, as corruption is approximately 10 times lower than tax evasion. Based on the values above, it can be concluded that the statement “corruption is the biggest problem in Brazil” is one more of the many myths of the fiscal context that circulate freely and strongly in the imagination of a good part of the Brazilian population, especially that part of the population whose main or only source of information is the virtual monopoly of the Brazilian press.

*Joao Carlos Loebens is a doctoral student in economics and tax auditor at the State Revenue Service of Rio Grande do Sul.

Originally published on Tax Justice Institute.

Notes

[I] Myths are like this: someone creates, others repeat and the rest believe and pass on. And the more the narrative is heard without reflection, the more the myth becomes indisputable and becomes true.

[ii]Corruption is not the main drain of public money in Brazil – https://www.conjur.com.br/2017-out-26/ricardo-lodi-corrupcao-nao-principal-ralo-dinheiro-publico#sdfootnote11sym