QUANTITATIVE LEAP AND QUALITATIVE PROBLEMS

If the Federal Single Tax is approved, it is not the bank transaction tax itself that may cause apprehension, but rather the level of the rate to be applied. Because the quantitative leap would be sizeable, up to ten times the present rate, it is likely that the qualitative dimensions of this tax could undergo significant changes.

The CPMF experience, since 1992, has already caused a strong impact, throwing aside traditional arguments that express hesitancy and aversion concerning a bank transaction tax. Its discontinuation, as of 2008, was caused primarily for political reasons, rather than for solid economic arguments.

Andréa Lemgruber and others have conducted research on the impact of the CPMF which, since 2001 have been published on the Federal Revenue’s website. These studies effectively disprove those arguments born of incredulity and antipathy, which stained a great amount of paper during the past decade.

Experience confirms, and the paper published by the IMF No. 01/67 acknowledged, that the tax, at least with moderate rates, as has been the case in Brazil, has been successful. It did not cause bank disintermediation, did not increase the preference for use of paper currency, did not cause a fall in the use of bank checks or debit cards, did not inflate prices, did not raise the cost of money, did not hurt investments, did not trigger dramatic restructuring of productive cycles, nor did it increase the regressiveness of the tax system. And it had little influence on the competitiveness of Brazil’s products abroad.

But it must be remarked that the proposed bank transaction tax’s hike to a new level is not equivalent to a higher CPMF, merely adding new tax obligations to those already in place. Rather, it means something wholly different. It means having a bank transaction tax that replaces almost all other federal taxes and contributions currently in effect. It would imply a beneficial replacement of the present tax burden for another with a distribution profile that is purposefully more widespread. As such, it is presumably more balanced and milder.

What we want to foresee is the public’s reaction, not to an increase in the current tax burden, but rather to its restructuring, with a new profile that will ultimately take a friendlier shape. A ten-time multiplication of the CPMF tax rate, that would be necessary for implementing the Federal Single Tax, would obviously be intolerable if it were merely an add-on to current taxes. That would effectively double the federal tax burden – completely out of question.

This is an ambitious target. Its implementation may require (at the time this text was written) a tax rate of approximately 3.5% (1.75% on bank account debits, 1.75% on credits), to be applied to each bank transaction. This estimation is the result of a somewhat simple extrapolation based on the current pattern of bank transactions and on current productivity of the CPMF which applies a 0.38% rate, with predicted revenue of 20 billion reais annually.

It is likely that the profile of bank transactions might undergo some changes in response to a rate that is ten times higher. But it is also possible that the tax’s productivity will increase, in response to more severe fraud deterrent regulation. Fraud already detected and eliminated by the Central Bank and the Federal Revenue allow for estimated revenue that is potentially 10 to 20% higher than current estimated revenue of the CPMF.

exemptions and immunities, except for reciprocal immunities among political entities of the Federation. Such increased revenue would probably compensate for the drop in revenue caused by the suggested system of taxation for the financial and capital markets.

In view of these generic parameters, it is clear that, for the time being, the search for more precise estimates would be a useless exercise. The only way to perform a conclusive empirical test of the model is to follow its implementation. This reveals the proposed tax’s flank most exposed to criticism, albeit subordinated to highly hypothetical reasoning.

The most skeptical critics will continue to place their bets on the assumption that it will be impossible to tax bank transactions at rates higher than 0.5%, or at most 1%, and they predict society will mobilize on a large scale to find ways to evade taxation of bank transactions.

The most optimistic critics will say that such figures are superstitious, and that everything will run smoothly, as it did with the 0.38% rate, because potential forms of evasion had already been exhausted or overcome.

A realistic posture must acknowledge that efforts to avoid taxation are normal, and predictably will increase since, as the rate increases, so do the rewards for avoidance. Tax avoidance measures that are not attractive at the current 0.38 rate could become much more attractive if the rate is multiplied ten times. Therefore, it is appropriate to ponder the viability of implanting effective deterrent measures, and to consider ways to prevent attempts to dodge the tax.

The measures considered within the legislative bill of the proposed tax, such as prohibiting endorsement of checks to third parties, demanding premiums to those who write bearer checks, punishing of those who write them, discouraging the use of cash, and others that may be proposed, are all infra-constitutional and regulatory measures in the commercial, banking, criminal, and administrative areas, and therefore extend beyond the bounds of a constitutional amendment.

It would be inappropriate to dwell into the details of these measures at this time, neither should they detract us from the focus of the discussion which addresses, not a complete fiscal package, but rather a political choice among taxation models in a democratic discussion within the Legislative.

Nevertheless, along with the proposal’s economic and political dimensions, discussion of the requirements for institutional analysis is also indispensable.

TAX REVENUE: AN ESSENTIAL FUNCTION OF THE STATE. THE