LAC Tax Forum LAC Tax Forum The Role of Tax System in Reducing Income Inequality and Promoting Social The Role of Tax System in Reducing Income Inequality and Promoting Social

CohesionCohesion

Panama Panama September 16-17, 2010September 16-17, 2010

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TopicsTopics

1. Measurement of the Tax Burden

2. International Comparison

3. Social Impacts

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Indirect Taxes (% of Food Expenditures)Indirect Taxes (% of Food Expenditures)

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Share of Federal and State Taxes on Food ExpendituresShare of Federal and State Taxes on Food Expenditures

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Taxes on Food Expenditures (% of Total Household Current Taxes on Food Expenditures (% of Total Household Current Expenditures)Expenditures)

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Main ResultsMain Results

The tax burden on food expenditures is highly regressive in Brazil as a whole. That is, the share of household current expenditures levied by taxes on food consumption is far greater for lower-income families than for higher-income families. This regressivity is present throughout all the states of Brazil.

On average, the tax burden on foods is mostly due to the state sales tax ICMS (56%). However, federal taxes and contributions (IPI, PIS and COFINS) also play a relevant role (44%).

The incidence of four distinct taxes and the diversity of state and federal legislation generate a multiplicity of tax rates. On average, in each state there are 30 possible tax rates applying to food sales.

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Value Added Tax (VAT) on Foods (%)Value Added Tax (VAT) on Foods (%)

Exceptions:Mexico - Processed foodsPortugal – Non-essential foods: 12%Ireland – Ice creams and pastries: 4.4%-13.5%

Cyprus – Ice creams, chocolates, pastries and biscuits: 5%-15%Malta – Processed foods: 5% England – Precooked meals, ice creams and chocolates

Country VAT Country VATGermany 7 Italy 4Austria 10 Latvia 18Belgium 6 Luxembourg 3Cyprus 0 Holland 6Denmark 25 Hungary 15Slovakia 19 Malta 0Slovenia 8.5 Mexico 0Spain 7 Norway 12Estonia 4 Poland 3Greece 9 Portugal 5Finland 17 Czech Rep. 5France 5.5 Sweden 12Ireland 0 USA* 0.66England 0

Average** 7.11

Sources: European Commission (2006) , OECD (2005), FDA (2006)

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Tax Exemption for Food Expenditures: Predicted Tax Exemption for Food Expenditures: Predicted Impacts on Poverty and IndigenceImpacts on Poverty and Indigence

StatePercent Reduction in

PovertyPercent Reduction in

IndigenceAbsolute Reduction in Poverty (persons)

Absolute Reduction in Indigence

(persons)

Pará 11.46% 26.26% 226,688 79,305

Pernambuco 6.61% 25.07% 214,136 148,054

Bahia 5.09% 15.84% 223,724 146,167

Minas Gerais 8.05% 18.94% 198,751 53,049

Rio de Janeiro 3.49% 7.71% 122,288 57,006

São Paulo 7.73% 23.59% 515,638 131,703

Paraná 5.08% 23.10% 53,476 25,905

Rio Grande do Sul 9.37% 24.22% 80,148 18,661

Mato Grosso do Sul 4.70% 10.85% 25,788 2,883

Goiás 4.88% 12.21% 84,566 21,408

Total 6.60% 18.08% 1,745,203 684,141

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Tax Exemption for Food Expenditures: Predicted Tax Exemption for Food Expenditures: Predicted Impacts on InequalityImpacts on Inequality

Gini Index Theil Index Gini Index Theil IndexPará 0,549 0,613 0,539 0,590 Pernambuco 0,580 0,737 0,571 0,712 Bahia 0,603 0,840 0,596 0,818 Minas Gerais 0,573 0,708 0,567 0,692 Rio de Janeiro 0,610 0,707 0,606 0,698 São Paulo 0,536 0,553 0,532 0,545 Paraná 0,546 0,591 0,541 0,581 Rio Grande do Sul 0,580 0,746 0,573 0,728 Mato Grosso do Sul 0,524 0,541 0,519 0,530 Goiás 0,563 0,672 0,557 0,657

StateWith Taxation Without Taxation

Poverty (% of Population) by RegionPoverty (% of Population) by Region

NorthNorth

SouthSouth

MidwestMidwest

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Indigence (% of Population) by RegionIndigence (% of Population) by Region

NorthNorth

SouthSouth

MidwestMidwest

NortheastNortheast

SoutheastSoutheast

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Gini IndexGini Index

NorthNorth

SouthSouth

MidwestMidwest

NortheastNortheastSoutheastSoutheast

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Main ResultsMain Results

In the ten states that were analyzed, a tax exemption for foods could have significant impacts on poverty (6.6% reduction) and indigence (18.1% reduction). Extending this result to the whole country, 2.5 million people would be brought out of poverty and 960 thousand people out of indigence. This tax exemption would also reduce the Gini index in 0.004 to 0.010 points.

As a comparison, over the entire 2001-2009 period, there has been a 39.7% reduction in the poverty rate, and only a 0.058 point reduction in the Gini index.

Over the entire 1980-2002 period, the decline in the poverty rate has been only 7.1 percentage points, while the Gini index remained stable at 0.60.

Overall, the tax exemption for food sales would bring a substantial contribution to the ongoing endeavors to reduce poverty and inequality in Brazil.