Brazil’s Lula Called to Account on Tax

Brazilian check

We are witnessing something almost unparalleled in the corridors of power in
Brasília and governors’ palaces all over Brazil – politicians of all parties
trying to reach agreement on an important issue that has nothing to do with
individuals, corruption or incompetence but about holding a government to its
word and making it responsible to the public.

The issue is the government’s desire to extend to 2011 a tax called the CPMF – the so-called check tax – which is levied on financial transactions. This tax was introduced in 1996 as a provisional measure lasting two years to raise resources for the public health service. However, as governments are reluctant to turn off a free flowing tap of funds the measure has been extended in terms of time and to other areas, such as combating poverty and paying for pensions.

It is now a major source of income – around 40 billion Brazilian reais (around US$ 19 billion). President Luiz Inácio Lula da Silva is desperate to keep this tax going but he may well have to settle for a bit less and even pledge to reduce or eliminate it in the coming years.

I remember thinking that the CPMF tax was a good idea when it was introduced and that a deduction of 0.2% of the value of any check I signed would not be too painful. However, I started to have second thoughts when the tax was extended and then almost doubled to 0.38%.

The resources did not seem to be improving hospitals and health care and started to be apportioned to other areas. A site called ContraCPMF points out that even though governments have collected 200 billion reais (US$ 112 billion) over the last 11 years from the tax it has made little difference to the state of the public health system.

The fact that it was applied on all transactions also started to hurt. There is a difference between paying 76 centavos on a check for 20 reais for a pizza but a down payment on a new car of say 28,000 reais will cost you around 120 reais.

The cost to industry is enormous. Imagine how much a big company is charged just paying its employees every month. I am not the only one which became disillusioned and Lula is finding that businesses and some members of the opposition are simply not standing back and letting him roll this tax over for another four years.

The big industrial associations, like the CNI and FIESP, have lobbied so hard that Lula felt obliged to meet a high-level delegation from around 100 companies to explain why he needed the CPMF tax to remain and why he was sure Congress would approve the extension. The businessmen were unimpressed, not only by Lula’s message but also by his lack of understanding of how business works.

Despite the strength of the representatives of business, Lula knows he still has the upper hand. First of all, the House of Representatives has approved the extension and his problem lies in the Senate. Secondly, this tax was not introduced by Lula’s Workers Party (PT) but by the PSDB of ex-President Fernando Henrique Cardoso.

The PSDB has two good potential candidates to replace Lula – José Serra and Aécio Neves, the governors of São Paulo and Minas Gerais, respectively – and neither of them wants to see the tax abolished or cut and leave them to find out ways of funding the deficit should either of them win the 2009 election.

Thirdly, the public is indifferent as is so often the case in Brazil. Most people do not have bank accounts and never use checks and as long as Lula paints a bleak picture of the effects of losing this tax on his goal to achieve greater social equality he will have their support.

The PSDB is divided on the issue and its senators are prepared to negotiate some changes, such as exempting investments in sanitation projects from other social contributions or reduction in the rate. However, the other main opposition party, the Democrats, formerly the PFL, is totally against it and wants to see it abolished.

Lula needs to get congressional approval before the end of the year so discussions will go on for some time longer. The government has to be certain it will win a vote as any extension requires a majority of three fifths of the Senate – 49 – as it is a constitutional amendment. Since the government does not enjoy the support in the Senate that it does in the Senate, it will have to tread carefully.       

In case readers outside Brazil are wondering why such a small tax should be causing such a big rumpus they should know that this tax comes on top of an enormous number of other federal, state and municipal taxes plus various others levied on consumption.

The Brazilian Institute of Tax Planning said that taxation amounted to 37.8% of GDP in 2005. This compares with 26.4% in the United States and 18.1% in Mexico. In other words Brazilians pay 50% more in taxes than Americans.

This situation means that the average Brazilian is working for the government for four to five months of the year. In return, the average working class and middle class taxpayer gets virtually nothing – poor education and health systems which lead the middle class to send their children to private schools and take out private health insurance.

Companies provide private health insurance plans, basic food baskets and, in some cases, pay for the education of their employees’ children. The taxpayers cannot even depend on the police to look after them and have to pay for private security services which outnumber the official security forces.

However, for Lula and most Brazilian politicians this is unimportant. Lula has still not made the mental transition from being a trade union negotiator who sees employers as exploiters and class enemies to a leading politician who should be trying to create value for the country rather than distributing what little value there is around.

John Fitzpatrick is a Scottish writer and consultant with long experience of Brazil. He is based in São Paulo and runs his own company Celtic Comunicações. This article originally appeared on his site He can be contacted at

© John Fitzpatrick 2007


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