I return to direct taxation to analyze the readjustment of the Income Tax on Individuals (IRPF) table.
In 2018, candidate Bolsonaro proposed exempting anyone who earned up to R$5,000 per month, an election year exaggeration. Now reality has prevailed, and President Bolsonaro proposes exemption of up to R$2,500 per month.
As my colleague at Ibre FGV, Manoel Pires, pointed out, the correction of 31% in the exemption range restores the real value of 2015, the last year in which the IRPF table was corrected, during the Dilma government.
In order not to lose too much revenue, the government proposes to correct the other IRPF bands by approximately 13%. The maximum rate of 27.5% will apply to income above R$ 5,300 per month. Is there an alternative? Yes, a lot.
In Congress, Senator Eduardo Braga (MDB-AM) presented a project to correct the IRPF table, which, in turn, was modified by Senator Jean Prates (PT-RN), suggesting an increase in the exemption range to R$ 2,737, 14, very close to the government’s proposal.
The difference with Senator Prates’ proposal, which I consider more adequate for the current economic situation, is in the upper ranges: creation of higher rates, on income above R$ 20 thousand per month, in order to finance the exemption for income lower.
Changing and correcting the IRPF table is not a simple task. From a theoretical point of view, the ideal is to tax all income equally, applying a progressive rate in the annual declaration and allowing deduction for withholding tax.
For example, suppose that, when withdrawing a financial investment, the person pays 15% of the income. In a system of taxation of all personal income, the IRS would calculate whether the 15% rate is adequate to the person’s total income. If the appropriate rate were higher, the individual would pay the difference on their annual tax return. If it were smaller, the government would refund the overpaid tax. The UK adopts this model.
Due to the multiplicity of personal income sources and the difficulty of income tax inspection, most governments in the world choose to tax capital and labor income differently, making up for this difference with some taxation on great wealth or inheritances.
In the case of exemption, there is a consensus among economists that the poorest should not pay IRPF, but the form of implementation varies. In developed countries, there is generally no exemption band. Everyone pays IR progressively, but low-income people can get the tax back from a government refund request.
The system works as a “Negative Income Tax”, but with the taxpayer paying first and receiving later, based on proof of their low-income status. The US adopts this model, via a tax credit for income received (Earned Income Tax Credit), which also works as a basic income for the poorest.
In Brazil, due to the costs and complexity of taxing and refunding income, as well as the political resistance to taxing the richest, we opted for a high exemption range and under-taxation of some types of capital income.
The ideal would be to migrate to a mix of the American and British model, building a more progressive table of all personal income and integrating the IRPF information base with government income transfer programs, in order to make a minimum income program feasible. .
But, while the ideal is not possible, we go with the correction of the existing IRPF table.
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