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Brazil and the Sales Tax Samba

By: Alan Cole

Simon Romero at the New York Times has written a piece discussing taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es in Brazil. A peculiar characteristic of Brazil is that its tax system is heavily centered on the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . The Times includes an infographic with several highly-taxed items. Some are taxed in excess of 40%. In contrast, the United States centers its system on income taxes.

Sales taxes, at their best, are minimally distortionary and effective at raising revenue. A sales tax is efficient if it resembles a complete tax on all kinds of consumption. In other words, the tax is levied on most consumer goods.

But Brazil can’t levy a complete tax on all consumption. Romero writes that some Brazilians fly to Miami for shopping binges to avoid paying Brazilian sales tax, and then attempt to sneak those purchases back into the country. This maneuver defeats the main virtue of consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es, which try to efficiently tax all economic activity equally, preserving efficient behavior. There is nothing efficient about hiding smartphones in your underwear.

There’s also the second half of the problem. Brazil is a beautiful country with great destinations for tourism. One of Brazil’s best opportunities to make money is by selling its goods to international travelers. This activity – the reverse of the Miami shopping sprees – is treated unusually harshly by the tax system. Tourists who already pay a full income tax burden in their own countries don’t want to buy $30 pizza.

This issue can be managed with appropriate reforms. Economists often write that sales taxes and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es have similar properties. Payroll taxes collect revenue as things are produced, and sales taxes collect revenue as things are consumed. As Adam Smith wrote, “consumption is the sole end and purpose of all production.” Everything that is produced is consumed, in one way or another.

Brazil should take this to heart and strike a better balance between the two types of tax collection. The United States also should look into a better balance; it has the lowest consumption taxes in the OECD. Extreme policy choices and heavily-concentrated tax collection efforts only encourage shenanigans.