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High Taxes and Excessive Red Tape Fuel Brazil’s Thriving Underground Economy

Street vendor in Brazil Recent statistics published by the Fundação Getúlio Vargas (FGV) indicated that Brazil’s Gross Domestic Product of unreported economic activity reached 578 billion reais (US$ 334 billion) in 2009, 18.4% of Brazil’s GDP, rising from 357 billion reais (US$ 206 billion) in 2003.  

The so-called ‘underground’ economic system – mainly consisting of activities such as informal labor, trade, tax evasion as well as the more serious conduct of prostitution, animal smuggling and drug trafficking – has been pointed as being larger than the size of Argentina’s entire GDP. 

The large growth of the underground economy, it is stated, occurred as a result of the Plano Real – between 1994 and 2004 – where its share of GDP grew from 20.71 percent to 42.60 percent.  

The research illustrates that the majority of informal economic activity is undertaken by the lower-middle classes who will often not declare their wages in order to retain whatever money they earn. 

Brazil’s high tax burden, which forms over a third of the country’s Gross Domestic Product, and a lack of public accountability are the main contributory factors; as pointed out in the recent election campaigning of José Serra, despite having one of the highest global taxation regimes, the investment levels in Brazil are one of the lowest. 

Other reasons include excessive bureaucracy and the ease of managing one’s financial affairs without the need of using Brazil’s system. 

According to ETCO (Brasileiro de Ética Concorrencial, the Brazilian Competition Ethics Association), the significance of the problem is placing the country at a significant disadvantage particularly in light of creating wide imbalances within business environments – limiting the growth of companies who play by the rule book.

However, at the same time, Fernando de Holanda Barbosa – head researcher of the report – indicated that it is quite possible for the pattern of informal activity to decrease in line with the growth trajectory that Brazil is witnessing. 

He attributes this reasoning to an increased desire to be part of the formal sector for social status; more employment opportunities; better salaries as well as credit access only being granted to those who have a proven income history amongst several other factors. 

He illustrates the effectiveness of modern tax collections systems such as the ‘Supersimples’ for micro and small enterprises which have alleviated many of the difficulties previously faced. 

Barbosa’s research also demonstrates that Brazil’s level of underground economic activity as a percentage of total GDP in comparison to other South American countries is significantly lower (Bolivia constitutes 60 percent, for example). 

Indeed, whilst not representing a momentous drop, the same research reported that the share of income from informal work in Brazil fell from 16.9% to 14.9% between 2003 and 2008 and the percentage of workers without a formal contract also decreased from 25.8% to 22.8%.

ETCO Advisory Committee Chairman, Marcílio Marques Moreira states that the first stage in decreasing informality is to develop opportunities that will encourage those to want to move away from such activity and also to distinguish and apply more punishments depending on the severity of the action. 

He also pointed to the fact that most sectors of Brazilian society are somewhat ‘guilty’ of indirectly participating in the informal sector – for example the simple act of buying a snack or an umbrella from a street vendor is fueling the problem when considered holistically. 

He also highlights the ambiguity in drawing clear-cut conclusions with regards to such research using the example of a street vendor who spends his/her money in a supermarket (who will pay taxes accordingly) thereby putting money back into the system and somewhat negating the effects.

Ruban Selvanayagam is a Brazil real estate and land specialist. For free e-books, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more please head to the Brazil Real Estate and Land Investment Guide via the following link: http://www.brazilinvestmentguide.com/brazil-property-real-estate-land/

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