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 It's a good bet that President Fernando Henrique Cardoso
will close out his second term in office in 2002 and
not conclude a proper tax reform, thus reneging on one
of the major campaign promises from 1994, the year he was originally elected.
By Adhemar Altieri
Each year, Brazilians witness a debate over how much of an increase the country's badly
anemic minimum wage should get. This annual political tussle usually takes place in the
run up to Labor Day, May 1st being when the new minimum wage traditionally
takes effect. When this year's edition of the debate arrived months ahead of time—so
early it actually got under way last year—many saw it as a possible attempt by the
government to conduct the discussion at a higher level than in previous years, hopefully
with less playing to the masses and more concern about practical results.
Only now is it becoming apparent that such noble intentions were strictly in the eye of
the beholder, and not in the minds of most participants from the Executive or the
Legislature. Seems those early impressions were just a preamble to a bizarre turn of
events, that may well result in yet another filching of Brazilian taxpayers. And this
time, the cash grab is based in part on a seriously flawed proposal that, according to
most jurists and legal specialists, is quite clearly unconstitutional and can't possibly
survive a legal challenge.
What left a positive impression at the outset was the fact government officials were
calling for the minimum wage increase to be defined in ongoing budget commission
discussions. More than that, the government said to Congress it could submit as big an
increase for the minimum as it liked, so long as it also pointed out what should be cut
from next year's budget to accommodate the proposed hike. These may seem like obvious
things to say and do when planning a budget, but it was all quite novel for Brazil, where
due process has traditionally been ignored by politicians, and minimum wage increases have
tended to be shouted into place long after the credibility-poor budget process is
concluded.
This government-inspired process actually got off to a good start around September,
with the left-wing opposition joining hands with government-aligned parties, all saying
they would find a way to raise the minimum to R$180—the equivalent of $100 at the
time. But just about every "solution" proposed, involved a tax increase of some
sort. This, in a country where the tax burden matches or exceeds that of many developed
countries, while services rendered at times make the onlooker wonder whether any taxes are
collected at all.
At one point, so many attempts that would "solve" the minimum wage riddle
through tax hikes were in discussion, that a seasoned newspaper columnist—probably
fearing another swipe at his wallet—wrote that throughout its history, Brazil has yet
to see a day when taxes were lower than the day before…
Finally, the past week saw Brazil's oh-so creative legislators in a suspicious alliance
of sorts with cash-hungry Revenue Department officials. Seems together they saw the light,
and at last came up with a way to raise the minimum to R$180 per month (no longer the
equivalent of $100 because the crisis in Argentina affected exchange rates in Brazil, and
R$180 is now worth closer to $90). The solution at hand was a set of measures currently
being sold to the public as new "government weapons against tax evasion".
A closer look will show they're just more of the same: measures designed to augment tax
collection, projected to yield an additional R$6 billion in taxes in 2001 (about $3
billion). And, the measures include one highly controversial twist: a new rule allowing
Revenue Department officials to break a taxpayer's bank secrecy, virtually without
judicial approval, if they suspect that taxpayer might be guilty of tax evasion.
Now, only a tax evader would complain about efforts to stop the practice in Brazil.
Evasion is a major problem, and the Revenue Department estimates that for every $1
collected, $2 get away through illegal activities and the burgeoning so-called underground
economy, where no sales slips are ever issued. But what we've got here is quite another
story. Remember this all began with the search for a way to cover the cost of raising the
minimum wage. Strangely, it ended up with a highly questionable measure now being rushed
through Congress at lightning speed—coincidentally, the same measure Brazil's Revenue
Department has been dying to have approved for quite some time…
The fact is that the Revenue Department has been successfully improving its tax
collection methods. Its success has become a key element in Brazil's positive fiscal
numbers and successive primary surpluses of the past few years (fiscal results before
interest payments are considered). The Department's efficient revenue-gathering
performance is seen by critics as a big reason why the government has shown next to no
interest in pursuing a sweeping tax reform—a vital reform Brazil badly needs, and all
sectors of society have been clamoring for.
Not only has the government not cooperated with tax reform, it has shot down attempts
by Congress to push it forward, and has done so rather blatantly. This is widely
interpreted to mean the government is satisfied with its revenue collection, and is simply
not interested in opening the incredible can of worms that is Brazil's tax
system—even if this means losing additional revenue, since proper, even-handed
taxation would probably encourage businesses to stay away from under-the-table operations.
It's definitely a small-minded approach with no regard for the long term and lacking in
ambition, something along the lines of why "rock the boat" if we're taking in
"enough" revenue as it is…
There's an added twist here. What recently got the Revenue Department excited about
gaining the right to break bank secrecies without judicial approval was a study involving
Brazil's infamous CPMF tax, which is charged on each banking transaction. By comparing
CPMF collection totals with income tax records, Revenue officials found that 11.7 million
individuals, and over 464-thousand companies which did not file an income tax return for
1998, together handled over R$341 billion (about $175 billion) in funds through their bank
accounts. Possible tax evasion of massive proportions? Definitely, although experts point
out there are numerous, entirely legal ways for cash that is not taxable income to flow
through one's bank account. So while there must be major tax offenders hidden in those
numbers, sweeping conclusions about all involved would not be advisable.
The CPMF was devised originally to raise money for the health system, a goal most
Brazilians seriously doubt was ever accomplished at any level by this tax—most
believe the funds have simply disappeared into the "black hole" of government
expenditures. It came with a clause that said the Revenue Department could not check CPMF
collection data against income tax returns. So the first step in the current strategy was
to eliminate that obstacle. This was done with a vote in the Lower House of Congress on
December 5. Then came the other measures, including the one allowing Revenue officials to
break bank secrecies, approved on December 6 and up for a vote by the Senate before the
end of the year 2000. After that, all it needs to be up and running is to be sanctioned by
the President.
It's important to note how this bank secrecy measure would actually work. The mechanics
of it are so revolting that they alone have been responsible for the avalanche of columns,
editorials, letters to the editor, plus radio and TV interviews slamming this measure
throughout the Brazilian media. Once the Revenue Department spots a suspected tax evader,
it will submit a request to the Judiciary, which then has six days to rule on the request
to break the bank secrecy. Should the Judiciary not respond within six days, the request
would be automatically considered approved. Given the massive caseload of the Brazilian
legal system, chances are slim at best that anything will be looked at in six days…
which is why the measure is being so criticized.
In effect, it takes away the Judiciary's prerogative and hands it to a government
bureaucrat, whose reasons for wanting to look inside someone's bank account may or may not
be valid. As many legal experts have put it, if approved this will be a definite blow
against citizenship and the proper development of an organized society. Not to mention the
Brazilian Constitution specifically says that the clause protecting an individual's bank
information cannot be the object of an amendment: it is a permanent clause…
A few plausible conclusions from all of this:
- Raising additional revenues is clearly still the priority, and the Brazilian
government remains seriously disinterested in tax reform.
- It's a good bet that President Fernando Henrique Cardoso will close out his second
term in office in 2002 and not conclude a proper tax reform, thus reneging on one of the
major campaign promises when he was originally elected in 1994.
- The Revenue Department already has instruments allowing it to go to the Judiciary and
break someone's bank secrecy. These are the same instruments available just about anywhere
in the world: basically, show the judge you have valid suspicions. Instead of doing things
by the book, the Revenue folks are trying to avoid the homework, the investigation
required to back such request. It's a lazy, unacceptable copout that hands a key
prerogative of the Judiciary to a government bureaucrat not necessarily as balanced as a
judge might be about whether or not someone's bank activities should be snooped on.
- It would be rather decent if the Revenue Department called a spade a spade: it
neither wants nor needs new tax evasion fighting instruments, all it's looking for is
easier, faster ways of collecting more tax revenues, to sustain the government's positive
fiscal performance.
- President Cardoso is coming under fire from all quarters, including many of his
allies, for reportedly being a staunch supporter of the bank secrecy proposal. He will
take additional, prolonged heat, if this proposal is indeed approved in its current form.
- For anyone wondering why legislators are pushing this through Congress so quickly
while tax reform sits forgotten for three years: keep in mind the "anti-tax
evasion" measures are projected to raise about $3 billion in 2001. $600 million of
that will be used up to pay for the minimum wage increase. The remaining $2.4 billion will
be at the disposal of Congress, to finance amendments and add-ons to next year's budget.
Think of the party one could throw with $2.4 billion, and all the happy voters a member of
Congress could guarantee back at the ol' political corral…
To think it was all a simple matter of how to increase the minimum wage!
Adhemar Altieri is a veteran with major news outlets in Brazil, Canada and
the United States. He holds a Master's Degree in Journalism from Northwestern University
in Evanston, Illinois, and spent ten years with CBS News reporting from Canada and Brazil.
Altieri is a member of the Virtual Intelligence Community, formed by The Greenfield
Consulting Group to identify future trends for Latin America. He is also the editor of
InfoBrazil (http://www.infobrazil.com), an English-language weekly e-zine with analysis
and opinions on Brazilian politics and economy. You can reach the author at editors@infobrazil.com
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