DIAGRAMAS DE SECUENCIA

One of the most frequently raised questions about a bank transaction tax has to do with its progressiveness. Critics claim it is regressive.

Actually, because it is a cumulative (turnover) tax, products that involve a greater number of transactions along the productive chain – with more roundabout production methods – and those that add less value at each stage, will be more heavily taxed. Thus, the Single Tax system should have a natural degree of progressiveness given that wage goods – staple products that make up the demand bundle for lower income families– would tend to have a lower tax burden than that of relatively more sophisticated products. Wage goods usually have less roundabout production chains, with less processing and a high rate of added value relative to the value of inputs at each production stage.

Another interesting feature of the Single Tax proposal is that income and production become no longer the main components of the tax base, as happens in conventional tax systems. The tax base would shift to financial transactions. Thus, productive activities become less taxed, and those that involve mere asset transfers, that currently are notoriously under-taxed, such as estate and personal property transactions, would be more heavily taxed.

The Single Tax proposal has, therefore, some essential characteristics that must be stressed: it ensures tax collection; it eliminates tax evasion and fiscal corruption; it increases efficiency of tax collection; it frees up significant resources in the private and public sectors; it is a comprehensive system; and it exhibits natural progressiveness.

Maria da Conceição Tavares evaluated the alleged regressiveness of bank transaction taxes, considering their incidence by income brackets. In her article “Imposto sobre circulação financeira”86 (a Tax on Financial Circulation) the author says, “The argument that the tax would basically penalize the middle class is unjustified. This is a tax that primarily penalizes individuals who turn the financial circulation of their savings into an extra and often considerable source of income.”

She further states, “because they are one of the dynamic vectors in the economic restructuring and globalizing process, bank transactions constitute one of the few potential bases for future taxation in which it is possible to anchor public revenue increases without punishing the productive sectors and the needier social segments”.

Because of the difficulties in simulating transactions for businesses and financial institutions, the results presented in her article refer to a partial revenue base, restricted to individuals, on whom a tax similar to the CPMF would be levied at a rate of 0.25%. The conclusions of the exercise rebut arguments that a bank transactions tax is unfair because it is regressive. Her conclusions (although they may have lost some validity given the increasing use of bank transactions by all income groups) are reproduced here, in full:

“1 - The lower-income groups, with average monthly income equal to 1 to 3 minimum wages and half of the group with average monthly income equal to 4 minimum wages – which together account for 70.6% of the reference population (income receiving individuals older than 10 years of age that are economically active) – are presumed not to use the banking system and therefore would not be directly affected by the tax.

2 - Of the remaining 29.4% that operate through the banking system, the tax burden falls predominantly on the higher-income groups (those with average monthly incomes that fall between 20 and 38.7 minimum wages).

This latter segment, which accounts for a scant 3.4% of the reference population and less than 12% of individuals with bank accounts, holds 29.2% of total income and would account for 63.5% of the IPMF revenue paid by individuals.

The group that has lower incomes (between 7.2 and 14.2 minimum wages per month), which represents 62% of the taxed universe and 18.2% of the reference population, accounts for 31.1% of revenue, whereas this group’s share of income is 38.6%.

Even the upper-middle segment, with average income of 14.2 minimum wages accounts for a smaller share of tax revenue than it should, given its total income. In other words, the argument that the tax would unfairly penalize the middle class is not supported. This is a tax that burdens those individuals who make bank transactions an extra and considerable source of income.

3 - The average effective rates on members of each group are also progressive, varying from 0.25% (affecting only that lowest-income portion of the group, which is taxed only once at the time of salary withdrawal), up to 0.70% levied on the group whose average monthly income is equal to 38.7 minimum wages.

Rate progressiveness is determined by values attributed to coefficients of financial circulation. The underlying theory is that greater savings coefficients correspond to higher income levels, and that the lion’s share of those savings goes into financial investments.

The portion of income that is earmarked for this purpose is expressed by the financial investments coefficient. This coefficient, in turn, is associated with a greater number and volume of transactions; in other words, a higher turnover rate of financial credits and debits. The relationship between the volume of transactions performed during the year and income determines the magnitude of the financial circulation coefficient.

4 - Finally, the index of progressiveness, presented in the simulation (which expresses the relationship among differentials of taxation and of average income among various taxable groups), shows absolute values that are increasing and greater than unit.

This indicates that higher-income sectors not only pay relatively more taxes, but they also pay at proportions that are much higher than the differences between

their average income and that of other groups.”

Conceição Tavares’s simulation truly demonstrates that an electronic transactions tax is proportional, or slightly progressive. It burdens more intensely those who have greater resources.

From the standpoint of corporations (which were not included in the exercise), the author says that, the greater the volume of bank cash withdrawals, that is, the greater the circulation coefficient and the turnover rate of financial capital, the greater will be the participation of the tax on the volume of income invested in the financial system.

Concerning the impact of the tax on prices, Tavares concludes that it should not be significant and it would not trigger (as it has not triggered) financial disintermediation.

Summarizing, Conceição Tavares says that an electronic tax is desirable, given that it does not create distortions in the productive structure and is levied proportionally on taxpayers. Furthermore, it reaches the informal sector and minimizes tax evasion. In other words, bank transaction taxes are shown to be reasonably progressive taxes in their patterns of incidence, directly contradicting those who accuse them of being regressive. The tax falls more heavily on rentiers, whether “formal” or “informal”. Maria da Conceição Tavares concludes by stating, “Financial circulation is the tax base of the future, given that, in addition to its continual expansion, it allows for electronic controls and, therefore, should allow for less tax evasion than is allowed by current taxes.”

As a direct tax, the bank transaction tax – in its formal expression – is neither progressive nor regressive; it is proportional, as long as it has a single rate. This means that for each individual transaction, the single rate would guarantee incidence that is proportional to the value of the transaction. Indirectly, as it becomes an item in production costs, it is alleged to be regressive.

Zockun M. H. estimated that the CPMF accounted for 2.2% of family income for the lowest income bracket (two monthly minimum salaries), and only 1% for families in the highest bracket (thirty or more monthly minimum salaries).87

Such results were not confirmed by other estimates, such as those of Paes and Bugarin showing a virtual proportionality in the CPMF incidence by income classes, varying from 1.31% and 1.33% of family income.88 Using family budget research by IBGE I estimated that the tax burden of the CPMF on total expenses were the following: 1.64% for families with 1.2 minimum salary of monthly earnings, 1.58% for the 3.20 minimum salaries bracket, 1.51% for the 6.5 minimum salaries bracket, and 1.41% for the 23 minimum salaries bracket. According to estimates by the Ministry of the Economy made public in Congressional hearings in 2007 the CPMF

87 _{[ZOCKUN, 2007(b)].}

is a “redistributive” tax, both by income classes and by regions of the country. According to the presentation 72% of the CPMF is collected by companies, and only 28% by individuals; of the revenue collected from individuals 17% are collected from the richest 10% of the population, and only 2% of revenue comes from the poorest 50% of the population. Actually it is very closely a proportional tax if we take account of possible measurement and estimation errors.

However, what really interests economists is the evaluation of tax incidence from the perspective of the complete set of transactions performed by individuals in the market. In this sense, the bank transaction tax can have a natural progressiveness, inherent to the different patterns of expenditures of the various income brackets of Brazil’s population, as shown by Tavares.89

Furthermore, a more equitable distribution of national income must not be sought solely through progressiveness in taxation, but rather through the final impact of the fiscal process, which is comprised not only of the pattern of taxation, but more importantly by the composition of public expenditures, which can be progressive or regressive. The Ministry of the Economy showed that the poor northern and northeastern regions of the country collect only 24% of the CPMF revenue, but receive 42% of the CPMF collected by the federal government. Thus, the CPMF is not as regressive as claimed.

The concept of tax progressiveness has been strongly attacked by several scholars. Indeed, “progressive taxation appears to have lost much of its political appeal…people became increasingly convinced that the economic costs of progressiveness were too high to make it worthwhile”. Furthermore, “what can be done through the tax system to redistribute income … no matter how extreme such redistribution might be, is unlikely to have much effect on the overall distribution of income”.90

Ives Gandra91 points to “the noticeable trend of European economies to begin, gradually replacing direct taxation, which has always been considered socially equitable, for indirect taxation, believed by economists to be regressive and anti- social. And the most curious consequence of this trend is that countries that have begun to reduce direct taxation have shown an increase in investments; and increasing investment is socially fairer because it generates growth, jobs, and better social conditions, facilitating the exercise of labor rights. On the other hand,

89 _{[TAVARES, 1995]. See also [CINTRA, 1994(b)]. In there I stated, “it is true that at the margin,}

that is, for products analyzed in isolation, the Single Tax is regressive. However, what needs to be evaluated is the progressiveness on average of all family expenses, and in this case the Single Tax would be progressive. (...) I should add that what we seek is progressiveness of the fiscal process, and not only tax progressiveness. Progressive taxation is not worth much if public spending is regressive, benefitting those who least need governmental resources. (...) the concept of ‘progressiveness at any cost’ has been quickly wearing down from the standpoint of public policy”. (p. 226).

90 _{[BIRD, 2003] p. 19.} 91 _{[MARTINS, 1990].}

progressive direct taxation (...) ultimately causes recession and inflation, with unemployment, lower wages, and less possibility for a proper dialogue on the claims of the labor class. Europe, well into the 1980s, decided openly to head toward abandonment of ideological social justice theories, which are inhibitors of development, and to begin to thread the pathways of the practical theories of international competitiveness, the only [theories] that are truly equitable from a communitarian perspective. This is the reason for which the European Union is turning to two orders of taxes; that is, indirect taxes and social contributions, gradually reducing direct taxes, including income tax.” 92

On this same issue, Roberto Campos93 addresses the question of equity in Brazil’s tax system. He says, “Our fiscal ethics have been practically destroyed. The great American judge, Oliver Wendell Holmes, said that to pay taxes is to purchase civilization. In Brazil, it means acquiring annoyance. The taxpayer has three perceptions: a) the Government does not return reasonable services, even minimally; b) the fiscal system is extremely complex, with high bureaucratic costs and three levels of corruption; c) the federal revenue agency is wholly inequitable because government-owned companies, which are notoriously noncompliant, and the entire informal economy escape the tax burden. Only one-third of the economy, represented by organized businesses in the private sector and by formally registered payroll wage earners actually pays taxes. The other two-thirds are delinquents. Thus, the estimated fiscal burden of 24% of GDP (in 1991), which would seem reasonable in worldwide terms, is abusive when it is levied solely against the formal private sector. Not to mention, of course, the inflation tax.”

Roberto Campos continues criticizing the excessive progressiveness of taxes: “It is a socialist superstition. Everyone must pay proportionally to their income. To impose on successful persons burdens that are more than proportional to their income is simply a confiscation, only understandable if: a) the wealth is undeserved and to be punished and is not, as often occurs, the result of greater diligence and creativity; b) if the Government were inspired by Puritan ideals, with unquestionable priorities, and were not a squandering spender. The best fiscal system is that which does not punish the rich, but which preserves for each person the maximum of incentives for its productive capacity. ‘Fiscal justice’ is much better served from the expenditures side than from the revenue side of the budget.” Indeed, “any serious fiscal attempts at poverty alleviation must be undertaken primarily on the

92 _{United States Treasury Secretary Paul O’Neill suggested, in May 2001, that the corporate income}

tax be eliminated. See also [TANZI, 1993] pp.125-143, where he claims that “proportional general sales taxes have gained in popularity as compared with highly progressive income taxes” (p.132), and

defends the application of a minimum corporate income tax, using gross sales revenue as the tax base. (p.135).

expenditure side the budget.”94

Mario Henrique Simonsen95 reaffirms the same concern about excessive progressiveness, saying, “Today, the merits of progressiveness are strongly contested. A good portion of developed countries has considerably reduced the number of progressive rates, as well as the maximum rate. And the trend seems to return to proportional taxation, with one single exception: the exemption limit below which the taxpayer is released from any tax. The fall of the myth of progressiveness is due to several factors. First, the distribution of wealth promoted by the Government is not a function merely of a single tax, but depends on a set of taxes, and most importantly on the composition of public spending. What good is there in having an income tax that is strongly progressive if other taxes live along side it that are strongly regressive? The best thing would be to merge them into a single proportional or averagely proportional tax. On the other hand, what good is a progressive tax system if public spending benefits the rich much more than the poor? It would be better, in that case, for the budget to shrink and for the market to handle the conflicts of interest of the rich. Truthfully, the great distributive task of the Government should be handled through the operations of public spending, offering education, health, and assistance to the most needy. By doing this, the enchantment of progressiveness would, at least to a great extent, be undone.

“Secondly, excessive progressiveness simply makes the taxpayer more disinterested in working and in assuming risk, which explains the stagnation produced by the welfare state of England’s Labor Party, which was rightly dismantled by Prime Minister Margaret Thatcher. Why work harder and run more risk if the Government takes 80% of the earnings, when these are positive? In the 1970s we discovered the obvious: highly progressive taxes engender laziness.

“Thirdly, progressiveness creates the incentive for transferring fictitious income from one taxpayer who has a higher marginal rate to another who has a lower marginal rate. Suppose one individual, X, whose marginal rate is 50%, is a customer of physician Y, who has a 30% marginal rate, and let us allow for medical deductions, as is usual, to be deducted from taxable income. One additional $1 in

94 _{On this issue see [BIRD, 2003] p.38; see also [CETRANGOLO and GÓMES-SABAINI, 2007],}

where the authors conclude that the redistributive effects of both income and value-added taxes are very modest, and that public expenditures have a much stronger impact on income redistribution in Latin American countries (p.38). For a statement showing the inefficiency of fiscal incentives, see [HERBERGER, 1993] where he states that: “public finance experts have broadly agreed that the great bulk of incentive legislation has had high costs, reducing fiscal revenue and economic efficiency at the same time” (p. 30).

95 _{[SIMONSEN, 1991]. It is interesting to note that a large portion of the complexity of current tax}

systems stems from the structure of progressive rates. In the case of the Single Tax, it is possible to maintain a single rate while at the same time guaranteeing a measure of progressiveness, through deductions. As mentioned by [MILLS, 1990] “it is a common misconception that you must have graduated tax rates to achieve progressivity. This is not true. A single rate tax with allowances can be more progressive than a graduated rate system that allows loopholes”. (p 28).

medical receipts is worth 50 cents to the customer and costs only 30 cents to the physician. The natural incentive would be a fake receipt from the physician to the customer. The customer would give the physician a check, and the physician would return $1 in cash. This example of fictitious transfer of income is merely one among thousands in a progressive tax system – and there is no screen so finely meshed that it is capable of preventing it.”

On this same issue, Prof. Roberto Mangabeira Unger goes further, asserting that, “in the short run, and under the conditions of most contemporary societies, the progressive structure of taxation is irrelevant, when not harmful.” 96

Mangabeira Unger goes on, stating: “a comparative study of taxation and public spending reveals a shocking fact. There is an almost inverse relationship between the theoretical fairness of tax systems and the success each of them may actually have in funding social expenditures for investment and for income equalization. In places where there is, in fact, more redistribution, such as France, indirect and ‘unfair’ taxation of consumption serves as a major source of public revenue. In countries where inequalities are stronger and social spending is restricted, such as in the