Regressive taxation and economic stagnation

Image: Lucas Vinícius Pontes
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By JOSÉ CELSO CARDOSO JR. & EDUARDO FAGNANI*

Um fair and progressive tax system is one capable of mitigating or reversing historical-structural situations of extreme inequalities

How to break the vicious cycle of income concentration and economic stagnation in Brazil? Here, regressive taxation and the financialization of wealth and public finances have worked as mechanisms for income concentration and sterilization of the productive potential of the public fund in the country. On the one hand, this restricts and penalizes the consumption capacity and real purchasing power of the vast majority of the population, and on the other hand, it structurally affects the potential for economic growth and well-being of this society.

The reason for this is that taxation in Brazil is highly regressive and goes against the grain of relatively less unequal capitalist countries. We have a system marked by high taxation on the consumption of goods and services and reduced taxation of high incomes and large assets. As a result, the weight of indirect taxes captures a significant part of the income of the poor, while obtaining only a residual portion of the income of the wealthier classes.

As is known, the origin of the public fund derives from economic-monetary relations present in broad processes through which the government's primary collection is carried out, but it has been increasingly appropriated by a few privileged private agents who hold power economic. In this way, the Brazilian tax system is tailor-made for the phenomenon of financialization, as demonstrated in the book Financial dominance and privatization of public finance in Brazil (Cardoso Jr, JC and Marques, R. – Fonacate, 2022).

In Brazil, the transmutation of the public fund takes place through the setting up of a normative and institutional arrangement that has been crystallizing financial forms of valuing income flows and stocks of wealth for its intertemporal dynamic realization. In other words: almost all economic, social and territorial segments of the country contribute, through the various existing forms of taxation, to the formation of the national public fund, however, a growing part of it is transmuted into financial public expenditure destined for rollover and /or reduction of previously contracted government debt. Thus, a regime of financial dominance is configured, strongly mediated by national public finances.

Now, we know that in a monetary economy of production, where the country issues its own currency and the debts and other financial assets are expressed in that currency, the government does not need to collect first to spend later, because ultimately it will always be able to issue in order to self-finance, even though, under conditions of full employment of production factors, this may generate inflation and other real imbalances in the economy as an undesirable result of this practice.

In any case, even so, it is necessary to have a mandatory and preferably progressive taxation system, if one of the objectives of this country is also to produce tax and redistributive justice, to be honored in this legal tender currency, so that economic agents have to demand and use this currency to pay the respective taxes and also to carry out their own private transactions, legitimizing it as the preferred national currency, while recognizing and legitimizing the State's own political power in the field of currency creation and management in that geographic space.

For this reason, as well as in the crises of the last century, progressive taxation on high incomes and wealth was once again recommended by the establishment International. In other words, it is the international institutions themselves (such as the IMF, OECD, World Bank and ECLAC, for example) and central country governments (such as the US and others) that are proposing to “spend more”. “Please spend. Spend as much as you can and then spend some more,” said Kristalina Georgieva, managing director of the International Monetary Fund (IMF).[I]

In addition to “spending more”, these actors propose “taxing more”, both the high incomes and wealth and the extraordinary profits of large corporations, to finance essential services. Along these lines, the view of the Financial Time economic commentator is emblematic, for whom “taxing and spending could become the new normal in the economy”.[ii] The IMF itself proposes to increase the “progressivity of taxes on groups that are more affluent and less affected” by the crisis.[iii] Inheritance taxation is "the right tax at the right time", says the OECD's head of tax policy and statistics.[iv]

Economists from the Inter-American Development Bank (IDB) also advocate progressive taxation to face the post-crisis scenario: “taxes are the price we pay for a civilized society”. In the case of the Biden Plan, part of its funding will come from the Tax Plan Made in America, which expands the taxation of high incomes and wealth of individuals, corporations and large multinationals.

In Brazil, therefore, reducing inequality and expanding tax justice is a civilizing imperative, as we are one of the nations with the widest gap between rich and poor in the world and our tax system is one of the most regressive on the planet. The country is going through its biggest health, socioeconomic and humanitarian crisis in history, which contrasts with the formidable enrichment of its billionaires since the beginning of the pandemic. Therefore, in a heterogeneous, unequal and unjust country such as ours, the tax and fiscal systems need to fulfill socially restorative and economically redistributive roles.

To do so, it is urgent to overcome two liberal myths, according to which: (i) the best taxation would be that which is proposed to be neutral from the point of view of the incidence of taxes on different income classes; and (ii) income inequality would be economically beneficial by stimulating greater individual effort and performance, responsible – always in accordance with competitive economic logic – for greater productivity, wages and, at the end of the day, greater well-being for all.

Against such arguments, it is necessary to remember that recent studies have shown that inequality is, in capitalist societies, both a social evil in itself, due to the collective breakdown and personal misfortunes it entails, as well as an economic and political evil. From an economic point of view, inequality exacerbates the general inefficiency of the economy, since economically unequal societies mean huge contingents of populations at working age or unemployed/unemployed/despondent, or inserted in precarious jobs, generally associated with low levels of productivity and wages, instability and insecurity about their present and future positions, in addition to the absence or precariousness of social protection schemes against market risks and uncertainties.

From a political point of view, nowadays it is already clear that unequal societies contribute to the delegitimization of democracy, since huge contingents of populations are prevented from participating in the country's crucial decision-making processes, as well as constrained to vote with the horizon of calculating only the short term and the imperative of immediate survival, situations that favor the commodification and disqualification of the vote, as well as the formation of coalitions and conservative governments that are not very committed to structuring medium and long-term solutions.

For all these reasons, a fair and progressive tax system is one capable of mitigating or reversing historical-structural situations of extreme inequalities, such as has always been observed in Brazil. To do so, it needs to be progressive in tax collection and redistributive in public spending.

Being progressive in tax collection means saying that it needs to be able to tax/collect proportionally more from the richest than from the poorest, including making the most vulnerable social classes exempt from paying/paying taxes, without sufficient income even for their own sustenance and maintenance . This principle of tax collection progressiveness needs to be applied both to the stocks of patrimonial and financial wealth of the different economic groups, as well as to their real and financial income flows.

In turn, the fight against inequalities in these societies needs to be complemented with measures to redistribute stocks and flows of real and financial wealth, from the richest to the poorest, through public policies under the command of the State, but at the service of the poorest populations. vulnerable. This can happen both through permanent policies of sustained appreciation of basic wages in the economy, and through programs of direct transfer of monetary income, along the lines of a universal basic income of citizenship, following the criterion that only those who institutionally demand this needs will be met, as well as through the full universal access of this population to essential contemporary public goods and services, such as health, family/home assistance, education, work, income and social security protection in old age.

This is, therefore, a radical proposal of social justice for tax and fiscal equity, which transforms the State into a central agent in the process of combating inequalities and equalizing opportunities by equalizing the distributive results of this society. The time for civilization to turn towards this path is now, and it seems that it has already begun.

*José Celso Cardoso Jr., doctor in economics from Unicamp, is a federal public servant at Ipea and current president of Afipea-Sindical.

*Eduardo Fagnani é professor at the Institute of Economics at Unicamp.

 

Notes


[I] “Spend as much as you can, and then some more,” the IMF tells governments around the world. R7, 16/1/2021. https://livecoins.com.br/gaste-o-maximo-que-puder-fmi/

[ii] Taxing and spending could become the new normal in the economy”, Martin Sandbu, Financial Times. Value, 5/8/2020. https://valor.globo.com/mundo/noticia/2020/08/05/taxar-e-gastar-pode-virar-o-novo-normal-na-economia.ghtml

[iii] Why taxing the richest can be a way out for indebted countries after the pandemic, in the view of the IMF. Alessandra Corrêa from BBC News Brazil, Sheet, 14/10/2020. https://economia.uol.com.br/noticias/bbc/2020/10/14/por-que-taxar-mais-ricos-pode-ser-saida-para-paises-endividados-apos-pandemia-na-visao-fmi.htm?cmpid=copiaecola

[iv] Taxing inheritance is 'right tax at the right time', says OECD. Folha de S. Paulo, 11 / 05 / 2021. https://www1.folha.uol.com.br/mercado/2021/05/taxar-heranca-e-imposto-certo-no-momento-certo-afirma-ocde.shtml

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