Lula Seeks to Tax the Rich to Help Balance Brazil’s Budget

(Bloomberg) -- President Luiz Inacio Lula da Silva’s recipe to raise revenues and balance Brazil’s budget mirrors a strategy leaders around the world have attempted to deploy: New taxes on his country’s wealthiest residents.

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Lula’s economic team unveiled this week a series of measures to tax closed-end and offshore funds that are usually accessible only to deep-pocketed investors. The plans, which could bring in an additional 20.3 billion reais ($4.2 billion) in revenue next year, are meant to help eliminate Brazil’s primary budget deficit while also making its tax system less regressive.

Both goals may prove difficult to achieve. Congressional leaders have already expressed skepticism about the tax rates outlined in the initial proposals. And even if they become law as designed, the government will still need to raise additional revenues in order to turn this year’s expected primary deficit of 145 billion reais before interest payments into a balanced result in 2024.

Brazil’s system penalizes the poor due to the structure of its tributes. The tax burden reached 33.71% of gross domestic product in 2022, with taxes charged on goods and services, which have a larger impact on low-income citizens, accounting for 13.44 percentage points of the total. Levies on income and profits, more aimed at the rich, represented 9.18 percentage points.

No Robin Hood

Lula’s plan sets tax rates that range from 15% to 20% on closed-end funds, which raise fixed amounts of money from shareholders in an initial public offering. The levy, imposed by the president on Monday through a provisional measure that needs to be ratified by lawmakers, will be collected twice a year. He also sent to congress on Tuesday a proposal to create the new tax on offshore investments, companies and trusts that includes progressive rates from 0% to 22.5%.

“What we’re doing is fair and sensible,” Lula said Tuesday after sending the bill to lawmakers. “I expect congress to protect the poor rather than the rich because Brazil needs that to become a more democratic, equal, middle-class society.”

Another bill likely to be sent to congress shortly would end a mechanism that reduces income taxes paid by large companies, generating an additional 8 billion reais a year for public coffers.

But Finance Minister Fernando Haddad will need a lot more to deliver on his promise of a balanced budget. Considering an expected increase in government spending next year, nearly 200 billion reais in additional revenue are required to eliminate the primary deficit.

Privately, Haddad’s team has begun to acknowledge that he may break his promise to fully close the budget gap in his first attempt. But the new taxes are also meant to foster “social justice,” he said Monday.

“The press often describes such measures as a sort of Robin Hood action, as a revenge,” he said at the signature of the provisional measure that taxes closed-end funds. “That’s absolutely not the case, we’re trying to move our tax system closer to what’s most advanced in the world.”

Read More: Brazil’s Balanced Budget Dream Is Running Into Revenue Reality

Other prominent global leaders have similarly sought to increase taxes on the rich to help pay for their priorities or make tax systems more progressive: In the US, President Joe Biden campaigned on reversing tax cuts for the wealthy approved during the Donald Trump administration. He also sought to close loopholes popular among the richest taxpayers.

But he was unable to get those plans enacted even when Democrats controlled Congress. With Republicans currently in charge of the House, his plans are on hold for now.

Obstacles in Congress

Former Brazil President Jair Bolsonaro also tried to boost taxes on the rich with a 20% levy on dividends, which are currently exempt. The idea faced pushback from investors and failed to progress in congress.

Lula’s plans also require congressional approval, and lawmakers like lower house Speaker Arthur Lira have shown little willingness to advance them at least in their current form. When Haddad announced the proposals, at a public ceremony on Monday, the audience applauded. Lira, who was sitting next to Lula on stage, did not join in.

“There is resistance in both houses, we have to convince people,” Senator Jaques Wagner, the government leader in the upper chamber, said in an interview after the event. “People don’t want to increase taxes in general, so we have to copy the richest countries by charging more of those who have more. I don’t know any other way to do justice if it’s not this one.”

Aside from higher taxes on the rich, the government is also counting on other revenue increases, including one that resulted from a decision from Brazil’s Superior Court of Justice. Judges recently decided to limit the use of state tax credits that companies use to reduce how much they pay in corporate income taxes.

That could bring in more 90 billion reais in revenue, according to government projections. Since the court’s decision, however, companies have started adjusting their balances to reduce its impact on their businesses.

--With assistance from Erik Wasson and Bruna Lessa.

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