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Brazil’s Taxes Going from Bad to Worst

By: Gavin Ekins

The European Union (EU) has requested that the World Trade Organization (WTO) establish a panel to review Brazil’s discriminatory 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. Brazil has a series of tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. s for domestic firms and customs duties on imports that increase the price of EU goods by up to 80 percent in Brazil. In addition, the tax exemptions require Brazilian manufactures to use locally sourced components. The EU argues that these tax provisions constitute a prohibitive barrier to trade and violate WTO rules.

The request by the EU comes as Europe is struggling to stave off a recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . Leveling the playing field to increase exports would certainly help the Member State, but Brazil has fallen on hard times as well. High inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. has destabilized the economy and a hotly contested presidential election has added to the uncertainty.

Part of the uncertainty relates to Brazil’s tax code, which has been in flux ahead of the Brazil’s national elections. Brazil’s President Dilma Rousseff introduced tax breaks as her popularity waned in the spring of 2014. Income levels on tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s were pushed up by 4.5 percent to alleviate the effects of high inflation while businesses received an extension on tax cuts for IT goods and machinery as well as a special tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s of up to 3 percent of exports’ value.

The Brazilian government may not be able to sustain these cuts in the long-term. Brazil’s central bank posted data showing the primary budget deficit of 25.5 billion reais ($10.4 billion), which far exceeded market prediction for September, continuing the trend from August. If the country continues these deficits, the tax cuts may no longer be feasible and President Dilma Rousseff may have to make hard choices.

Now that Brazil’s national elections are over and President Dilma Rousseff has her second term securely in hand, the political incentives to keep the cuts have faded. Pressure from an expanding deficit and angry trading partners will test the Presidents resolve to maintain the tax cuts she has promised her constituents. It seems likely that 2015 will bring a change in President Dilma Rousseff’s promises.