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This article is part of the Online Forum: The Redistributive Impact of Fiscal Policies
Historically, Brazil has had one of the highest levels of inequality in the world; in 1989, for example, Brazil had a Gini coefficient of 0.63, making it the second most unequal country in the world, narrowly behind Sierra Leone (Ferreira, Leite, and Litchfield 2008). Over the last decade, however, inequality has been falling in Brazil, as in other countries in Latin America (Lustig and López-Calva 2010). The recent decline is largely due to increased public cash transfers (Barros et al. 2010) and a more equal distribution of educational attainment resulting from expanded access to education in the 1990s (Gasparini and Lustig 2011).
In The effects of Brazil’s high taxation and social spending on the distribution of household income, we try to estimate the redistributive effect of fiscal policy in Brazil. In particular, we estimate the effects of taxation (direct and indirect) as well as cash transfers and in-kind benefits on income distribution and poverty.
Social spending as defined in the benchmark scenario accounts for 16 percent of GDP in Brazil. This figure includes social assistance, health spending, and education spending and includes spending at the federal, state, and municipal levels. If we also include spending on contributory pension payments as part of social spending, as is often done, social spending is 25 percent of GDP.
Direct transfers include conditional cash transfers programs such as Bolsa Família; Non-contributory pensions programs like Benefício de Prestação Continuada; Unemployment benefits programs such as Fundo de Amparo ao Trabalhador; Food transfers; Special circumstances pensions, and others. Education in Brazil is free at all education levels, including preschool and tertiary education. There is also free public daycare provided for poor families. Health care is free for all types of care; Brazil has the Unified Health System (SUS in Portuguese) which guarantees access to health care to every citizen at public health facilities.
We use data from different sources to build our data set on social spending. Data on household incomes, taxes and transfers comes from Pesquisa de Orçamentos Familiares (Family Expenditure Survey, POF), 2008-2009; Unemployment data comes from Ministério do Trabalho (2011); and data on the use of public health services comes from Pesquisa Nacional por Amostra de Domicílios (National Household Sample Survey, PNAD), 2008. The rich detail of our data set allows us to single out the effects of each direct transfer and tax without needing to simulate taxes or benefits. This has the advantage that unlike incidence studies based on microsimulation models, our study is based on what individuals actually pay and receive (assuming they report correctly), rather than what tax and program rules dictate they should pay.
There are more than eighty-five taxes in Brazil (Portal Tributário 2012). Total tax revenues were about 35 percent of GDP in 2009. Direct taxes represent 45 percent of the taxes levied by the government and indirect taxes represent 55 percent. The standard deduction is equivalent to 20 percent of the taxable income (marginal rates range from 15 to 27.5 percent). Less than 10 percent of the economically active population pays income tax. Corporate taxable income is taxed at 25 percent. In addition, businesses must pay social contribution taxes on profits (9 percent on net taxable income).
The Brazilian tax system is exceedingly complex and the “cascading effect” is one of its major distortions (Amaral, Olineike, and Amaral 2007). The cascading effect derives from the fact that taxes levied at the federal, state, and municipal levels compound on each other. This occurs because the taxes are applied to the final sales price of the good (including taxes), not the pre-tax sales price. As we are analyzing the effects of fiscal policy on income inequality and poverty, the distortions created are even more important, considering the effects of indirect taxes on consumer purchasing power.
Brazilian Tax Revenue, 2009
Source: Amaral et al (2011).
To assess the impact of taxes and social spending, we use a variety of measures of inequality and poverty, the concentration of benefits received and taxes paid with respect to market income, and effectiveness indicators. Our results show that market income inequality is very high in Brazil, with a Gini coefficient of 0.57.
Gini and Headcount Index for Different Income Concepts, Brazil 2009.
To measure the impact of fiscal policy on poverty in a middle income country, we use the international poverty lines proposed by the World Bank.1 Ultra poverty is reduced by 55 percent by direct transfers (net of any direct taxes paid), extreme poverty by 28 percent, and moderate poverty by just 14 percent. However, when indirect taxes are considered, the reduction in ultra poverty is significantly tempered, the reduction in extreme poverty nearly disappears, and moderate poverty actually increases when one compares market income with post-fiscal income. The moderate success of direct transfers at reducing poverty can be attributed to high coverage of the poor: 85 percent of the poor live in households receiving at least one direct transfer; the figure is even higher among the extreme poor (93 percent) and the ultra-poor (98 percent).
Our results show that in comparison to other countries in Latin America, Brazil has relatively high taxation and spending, but poor targeting of direct transfers overall, and low inequality and poverty reduction relative to its spending. Some programs, such as Bolsa Família and Benefício de Prestação Continuada, are well-targeted, but they make up a small share of social spending. Others, such as unemployment benefits and special circumstances pensions, are large and progressive only in relative terms. While public health spending is progressive in absolute terms for each type of care, tertiary education spending is almost neutral in relative terms, indicating that the better-off receive most of the benefits.
Concentration Coefficients and Budget Sizes for Selected Programs, Brazil 2009
Overall, direct taxes and transfers reduce the Gini by 6 percent, and in-kind transfers are particularly equalizing: the reduction between the market income and final income Ginis is 19 percent. Although Brazil’s market income Gini is substantially higher (by at least 5 percentage points) than that of any of the other countries included in this special issue, its final income Gini is almost identical to Peru’s. Indirect taxes have a deleterious effect on post-fiscal income and often result in post-fiscal income poverty being higher than market income poverty.
1. US$1.25 PPP per day (ultra poverty), US$2.50 PPP per day (extreme poverty), and US$4.00 PPP per day (moderate poverty).,
Ferreira, Francisco H. G., Phillippe G. Leite, and Julie A. Litchfield. 2008. The rise and fall of Brazilian inequality: 1981-2004. Macroeconomic Dynamics 12 (2): 199-230.
López-Calva, Luis Felipe, and Nora Lustig. 2010. Explaining the decline in inequality in Latin America: Technological change, educational upgrading, and democracy. In Declining Inequality in Latin America: A Decade of Progress?, Luis Felipe López-Calva and Nora Lustig, eds., 1-24. Washington, D.C.: Brookings Institution Press.
Gaspirini, Leonardo, and Nora Lustig. 2011. The rise and fall of income inequality in Latin America. In The Oxford Handbook of Latin American Economics, José Antonio Ocampo and Jaime Ros, eds., 691-714. New York: Oxford University Press.
Amaral, Gilberto Luiz, João Eloi Olenike, and Letícia Mary Fernandes do Amaral Viggiano. 2007. Estudo sobre o verdadeiro custo da tributação brasileira. Instituto Brasileiro de Planejamento Tributário Working Paper, São Paulo, Brazil.