After closing 2021 with records, tax collection continues to record strong increases. In March of this year, the collection of federal taxes, contributions and fees reached the highest volume for the month since the beginning of the series monitored by the Federal Revenue, which began in 1995, 28 years ago.
It’s not just the federal revenue that is booming. The states have also presented expressive revenues. They made the biggest positive contribution to the fiscal primary surplus of R$3.5 billion in February, the first positive result since February 2014, eight years ago, with revenues exceeding expenditures by almost R$20 billion.
In the period, there was no creation of any new tax or even an increase in existing tax rates. If anything has changed in terms of taxes, contributions and fees, it has been in the opposite direction, with the reduction or elimination of rates, especially at the federal level.
What would then explain the impulse shown by the collection? The first part of the answer is that revenue grows as the economy grows. More production, more sales, more jobs, more wages result in an increase in the volume of taxes collected.
After the dip in activity due to the pandemic in 2020, the economic recovery registered in 2021 boosted public revenue. The 4.6% expansion that occurred configures a situation of cyclical recovery, in which the existing production capacity that was idle during the contraction period takes place.
This cyclical recovery reached economic segments with the highest tax burden. This is the case of the industry and, in particular, of the oil production chain. Specifically in the latter, the high profits obtained by Petrobras, with its policy of parity with import prices, collaborated to boost public revenue. The general rise in international commodity prices, several of which Brazil is a prominent exporter, also helped to bolster public revenue.
In addition to the recovery in production and sales, profits increased during the cyclical upturn. This was because there was ample idle capacity and, thus, the expansion of the activity did not require spending on new investments or non-routine expenses. Higher profits also contribute to increasing tax collection.
Government revenues also grow with rising inflation — and inflation is above double digits. The basis for collecting taxes is the price of the products sold and the services provided. Therefore, if the price goes up, the taxes and fees that are built into it also go up.
The portion of taxes that increases only with price increases is called “inflation tax”. An “informal” tax, but effective and concrete, as it reduces people’s disposable income and raises public revenue. With the aggravating factor that it hits the poorest sections of the population harder, as it increases the collection of taxes on consumption, which proportionally affects more the budget of the lower income strata.
It is a classic way in which governments, in unbalanced economies, finance debt and public deficits. How much of this increase in revenue can be considered permanent or temporary is a crucial question to be answered, and which remains open, but the Bolsonaro government will already be exempting on account — it reduced or zeroed, for example, IPI (Imposto sobre Produtos Industrializados) rates. .
For fiscal policy experts, this strategy of exoneration to boost activity, in the current circumstances, is risky. In the most reliable estimates, possible changes in the composition of consumption can at most represent between R$ 45 billion and R$ 50 billion in permanent gains in collection, which should greatly limit the tax exemption policy.
Spending or reducing revenue on account of a circumstantial tax result is nothing new. After the 2008 global crisis, something similar happened. The economy plunged in 2009, but showed a strong recovery in 2010 — in the last year of Lula’s 2nd term, growth hit 7.5%. As of 2011, Dilma’s government transformed the “excess” of collection into tax exemptions, with the aim of stimulating an economic activity that was already beginning to show signs of weakness. When the recession hit, it became evident that most of the increase in public revenues was not structural and was nothing more than a tax illusion.