T'HE T AX SYSTEM OF BRAZIL

FUNDAÇAO GETúLIO VARGAS

Comissão de Reforma do Ministério da Fazenda

LISIA DE PUBLICAÇÕES

Maio/ 1964 - Publicação N .O 1 - Relatório Preliminar

Novembro/ 1964 - Publicação N.O 2 - O Processo Tributário

Abril / 1965 - Publicação N .O 3 - Anteprojeto de Código

do Impôs to de Renda

Junbo/ 1965 Publicação N.O 4 - O Sistema Tributário brasileiro

Junho/ 1965 - Publicação N .o 5 - The Tax SlIstem of Brazil

F U NDAÇÃO GETÚLIO VARGAS
COMISSÃO DE REFORMA DO MINISTÉRIO DA FAZE NDA

'. r
O /-l.
LUIZ SIMOE~ LO PE S

THE TAX SYSTEM

OF BRAZIL
A REPORT TO THE GETÚLIO VARGAS FOUNDATION
BY
CARL S. SHOUP, COLUMBIA U N IVERSIT Y.

1965
BIBI.IOTECA
FUNOAÇM) GETOLIO VARGAS
COMISSÃO DE REFORMA DO MINISTÉRIO DA FAZENDA

QUADRO DIRIGENTE

Presidente
Luiz Simões Lopes Presidente da Fundação Getúlio
Vargas
Preftidente Substituto
Alim Pedro Diretor - Ex~'CUtivo da Fundação
Getúlio Vargas
Coordenador-Geral
Gerson Augusto da Silva Técnico de Economia e Finanças
- MF. Representante do Ministé-
rio da Fazenda
Coordenador do Setor de Acompanhamento
Ottolmy Strauch T écnico de Admin~~tnção - DASP
Coordenador do Setor de Automação
Elson dos Santos Mattos - T écnico de Mecanização - IBGE
Coordenador do Setor de Documentação e Assistência Técnica Intern8!CÍonal
Benedicto Silva Assesse,. para Assunto! Legislativos
- DASP. P rcfessor da Escola Bra-
sileira d e Admini stração Pública -
FGV
Coordenador do Setor de Imtalações e Equipamentos
Syndoro Carneiro de Souza Engenheiro - DASP
Coordenador do Seltor de Legislação
Arthur R ibeiro da Silva Filho - Oficial de Administração - MF
Coordenador do Setor de Organização e M étodos
Newton Corrêa Ramalho Técnico de Administração - MJNl
Coordenador do Setor de Pessoal
Paulo Poppe de Figueiredo - Assistente Jurídico - DASP
Coordenador da Equipe de Reforma do ImpÔsto Aduaneiro
O swaldo da Costa e Silva Agente Fiscal do Impôsto Adua-
neiro - MF

v
Coordenador da Equipe de Reforma do Impósto d e Con sumo
Werner Grau - Agente Fiscal do Impôsto de Con-
sumo
Coordenador da Equipe de R eforma do ImpÔsto de Renda
Guilherme dos Santos Deveza - Agente Fiscal do Impâsto de Ren-
d a - MP
Coordenador da Equipe de Pe~q uisas E conômicas
Francisco Sá Júnior - Economista
Coordenador do Escritório Regional em São Paulo
Astério Dardeau Vieira Técnico de Administração - DASP
Secretária-Executiva
Maria Joana de Almeida Fernandes AgentE' Fiscal do Impâsto de Renda
- MF

Qu ADRO TÉCNICO

SETOR DE ACOMPANHAMENTO

Assessor
Júlio de Almeida França - Oficial de Administração - MF

SETOR DE AUTOMAÇÃO

Encarregados
Edmundo Massadar Estatístico - IBGE
Erton PimEnta Bastos Escrevente-Datilógrafo - MF
Heitor da Câmara Vellozo Estatístico - IBGE
Oswaldo Ney Soares Carneiro Técnico de Seguros - IRE
Assessôres
Roberto Pereira da Silva
Valdecir Freire L opes
ASJSistentes
Gilzele Lygia Tenório dE' Melo
Jayme Bueno Brandão Engenheiro DASP
Lione Spivak Engenheiro DASP
Norton Tavares da Cunha Melo
Programadores
Antonio Sérgio de Freitas Leite
Cláudio Portela Peixoto
Duílio Cam E'fOn - Programador - SNR
Eliane Bretas Estêves
Luís Ernani de Morais Costa
Programador Auxiliar
Luiz Carlos B orges Delgado - E screvente-Datilógrafo - MF
Desenhista
E verton Pimenta Bastos
Estatístico
Francisco Alves de Sá
Auxiliar
Cláudio Dantas Pinto Pessoa - E~crevente-Datilógrafo - MF

VI
 SETOR DE DOCUMENTAÇÃO E ASSISttNCIA TÉCNICA
INTERNACIONAL

Che fe d o Subsetor d e Documentação

Ana M aria· B ernardes Goffi Marquesini - Auxiliar de P esquisa - FGV

A $;stentes
Ruy Vianna - Redator da Rádio Nacional
T erezinha d e Jesus Santos - Oficia l d e Ad m inistração - MJNI
Chefe do Subse tor d e Assistê ncia T écnica Internacional
A rthur Soares X avier Ferre ira - F iel do Tesouro - MF

A !'Sistentes
ArIette MuIler F iel do Tesouro - MF
G ise lle Muller Fiel do Tesouro - MF
Neusa Timponi Agente Fiscal do Impâsto de Ren-
da - MF
Yedda Berlink do R égo Macedo Fiel do Tesouro - MF
S ecret ária
Priscila Scott Bueno

SETOR DE INSTALAÇÕES E EQUIPAMENTOS

A ssisten1e
Antônio Jo~é Arêas RibEi ro - D esenhista - ETUB

SETOR DE LEGISLAÇÃO

Consultor E special
Pedrylvio Francisco Guimarães Ferreira - P rocurad or da Fazenda Naciona l
-MF

Chefe de E quipe
Luiza VilIela de Andrade d a Silva - Oficial de Administr ação - MF

A uistentes
Anna Luiza da Silva Ba rbcsa
Cláudio Mata de Almeida
Mi lton Acácia de Araújo
Oficial de Administração - MF
Aluno da E scol a Brasileira de Ad-
ministração P ública - FGV
Oficial de Administração - MEC

Auxiliares
Meria T a tiana da Gama B arandier Escrevente-Datilógrafoa - MF
S éq;;io Cardoso da Costa E .crevent ó·-Datilógra fo - MF

vu
 SETOR DE ORGANIZAÇÃO E MÉTODOS

Consultor Especial
Alvaro Brandão
Assessôres
Célia Neves Lazzarotto Técnico de Administr~çã.o - DASP
Daisy Florie Passarinho Pereira Técnico de Adinin'stração - DASP
Professôra da Fundação Getúlio
Vargas
Hélio Ma galhães Escobar Técnico de Administração - DASP
Luiz Carlos de Danin Lobo Professor da Fundação Getúlio
Vargas
Che fe de Equipe
Maria Lúcia Baena Machado Silva Agente Fiscal d o Impôsto de Ren-
da - MF
ílssistenfeJ
Dalba Va!concelos Oficial de Administração - MF
Edson Ferreira dos Santos
Francisco Queiroz de Carvalho Exator Federal - MF
Gilberto MontEiro da Silva
José Giovani Pacífico de Oliveira
Liliana Weinberger
Rosa Caroli - Agente Fiscal do Impôsto de Rem-
da - MF

E stagiário
G e rson AIVE'S Cabral

EQUIPE DE REFORMA DO IMPôSTO ADUANEIRO

Cot1...<'Ultor Especial
Arrnindo Corrêa da Costa Age'llte Fiscal do Impôsto Aduanei-
ro - MF

Asse$S"óre~
Augusto César Cardoso Funcionário da CACEX - Banco
do Brasil
D ébora Samp aio E scriturária - MME
Eduardo Abrahão Estatístico MF
João Fernandes de Almeida Estatístico - MF
Luiz Em)'gdio Pinheiro da Câmara
Maria C!eônia Macedo de Castro Freire - P rofessôra da Fundação Getúlio
Vargas
M oacir de M atos Peixoto
Néa Lopal Monteiro Sacco Agente Fiscal do Impôsto Adua-
neiro - MF

EQUIPE DE REFORMA DO IMPÓSTO DE RENDA

A.$'6'&ssóre~ Ettpeeiais
Léo Leite Costa Agente Fiscal do Impôsto Adua-
neiro - MF
Noé Winkler Agente Fiscal do Impôsto de Ren-
da - MF

vm

n
Asses~ôras
Es.tela Leijó Cardoso Agente Fiscal do Impôsto de Ren-
da - MF
Germânia Bastos Agente Fiscal do Impôsto de Ren-
da - MF
Helena da Costa Rodrigues Agente Fiscal do Impôsto de Ren-
da - MF
Hele::a Rocha de TejOõTa Agente Fiscal do Impôsto de Rendoa
la -MF

EQUIPE DE PESQUISAS ECONÔMICAS

Asses.!ôres
Gilberto Câmara Moog Proc urador dE' 308 Categoria -
PDF
Jorge Alberto Freitaos Ribeiro Oficial dOe Admini stração - Pre-
feitura de Pôrto Alegre

Assistente
Armando Barros de Castro

SETOR DE PESSOAL

A!\Ilessôra Especial
El oah Meirelles Gonçalves Barreto Diretora da Divisão de Seleção e
Aperfeiçoamento do DASP

ESCRITÓRIO REGIONAL EM SÃO PAULO

Consultor Especial
Henrique Silveira d e Almeida Assistente da Escola Politécnica de
São Paulo
Chefes de Equipe
Antônio Arr.ílcar de Oliveira Lima T écnico de Administração - Go-
vêrno do Estad o de São Paulo
Geraldo Pinheiro Machado Técnico de Administr;tção - DASP
Engenheiro Especialista em Mecaniz~o
Sal vador Perroti
En~enheiro Auxiliar
Fukuhera Takatika

Técnicos de Organização
Ernesto Lui gi C ermine de Ambrosis
Flávio Reis Cintra
Hélcio Ferreira Borba
Luiz Lorenzo Rivera
Marly FETrcira Pinto
Técnicc -Auxiliar de Organizaç.iio
F ernando Castro Aguiar

IX
Assistente de Orl1anização
Cás-sio de Momis
Técnicos de Pessoal
Antônio Carlos Bernardo
Evelyn Naked Castro Sá
Maria Lúcia Lorenzo Rivera
Nair SaBes da Silva
Sônia Celli
A sslÍStente
Gaspar Debelian

QUADRO AD:VII ~IS TRATIVO

SETOR DE ADMINISTRAÇ.\O GERAL NA FUNDAÇÃO

GETúLIO VARGAS

Chefe da Divisão de Contabilidade

Luiz Sidney Vidal do Couto
Chefe da Seção de Material
Albertino Fe-rro da Silva

SECRETARIA-EXECUTIVA

Chefes de Equipe
Walde mar Chamarelli Oficial de Administração - MF
Maria de Lourdes R od rigue s Diniz Oficial de Administração - DASP
A ssistentes
Esther Silva Ramos Oficial de Administração - DASP
GinettE' Pereira da Cunha Oficial d E' Admini stração - MJNI
Maria Orfila Melo Escriturá ria - MF
Sabino P e reira da Sil va E screvente-Datilógrafo - MF
Tsquígrafas
Trene Pereira de Sousa Taquígrafa MF
Yvonne de MCdaes Taquígrafa MF

D atilógrafos
Anita Sant' Ana
Atir Valente Bittencourt Datilógrafa - MF
Carme n Goml3 D atilógrafa - DASP
Celeste Serrano do Amaral Oficial de Administraçã o - MF
Dalva Lima Costa
Ed'na Rodrigues Paixão
Erimi ta B ene\'ides Kolesza Datilógra fa - MF
Jader Alcântara Vieira Datilógrafo - FGV
Joana Silva Braga Escriturária - DASP
Luíza Costa
Rharia Diehl Travasws E screvente-Datilógrafa - MF
Therezinha Baptista C osta Oficial de Administração - MF
Vera Maria OrnEoJIas Chaves
Auxiliar
P aulo Corrêa da Costa

x
 SETOR DE DOCUMENTAÇÃO E ASSISTÊNCIA TÉCNICA
INTERN ACIONAL

Assistente Administrativo
Eunice Magalhães Marques
Secretária
N eyde Couto das Neves
Auxiliares
Lúcia Maria Keller Sussekind
Maria Neusa Brasil Quartin - D atilógrafa - MJNl

ESCRITÓRIO REGIONAL DE SÃO PAULO

Secretária
Maria Celeste Martins FeTTeira Gomes
Datilógrafas
Hilda Pietrykowski
Carmem Lacerda Guaraciaba

CONSULTORES TÉCNrCOS INTERNACIONAIS

MIssÃo ESPECIAL
Carl s. Shoup Professor da C olumbi a University
New Y ork
Fred'erick J. Lawton Ex-Diretor do Bureau d e Orçamen-
t o dos E st ados Unidos
Jasper S. Costa

GRUPO PERMANENTE

( Tax Admin istration Adivisory T eam do Teso uro Americano,

enviado sob os a uspícios da USAID )

Diretor
G e"Orge J. Leibowitz Especialista em questões gerais de
administração fi scal
Subdiretor
Paul T. Maginnis E specialista em p roblemas de re-
gulamentação de le·is. tributárias
Assistentes
Edward J. Lewis Especialista em planejamento de
sistemas de processamento eletrô-
nico d e d ados
Hyman P. M oldover Especialista em pro b lemas. d e in-
vestigação fisca I
P atrick F . Keaney Especialista em probl emas de arre-
cadação
Stanley Stein Especialista em problemas de aud i-
t oria fi sca l.
 FOR EWORD

The Tax System of Bra.zil, now presented to the public in

the fonn of a book, is another contribution of the Reform
Commission of the Ministry of Finance to the Brazilian lite-
rature on the modern aspects of taxation.
In the privacy of the Commission, the present work is re-
ferred to as the «Shoup Reporb. It contains a study conducted
by Professor CARL SHOUP, Columbia University, New York
City, for the benefit of the Commission.
One of the greatest living authorities on taxation, Pro-
fessor Shoup has acted as an advisor to the governments of a
number of countries . At the invitation of the Getúlio Vargas
Foundation and under the auspices of USAID, he carne to Brazil
in August 1964, in the same capacity of tax expert.
To pave the way for his understanding of the true nature
of the Brazilian tax system, the Reform Commission of the
Ministry of Finance held two round tables. On both occasions,
the main speaker was Professor RUBENS GOMES DE SOUZA.
The first round table dealt with the Brazilian tax system as a
whole, its origin, its evolution and its present structure. The
second dealt with the income tax. In addition to the presiding
officer, LUIZ SIMõES LOPES, and Professor CARL SHOUP,
several experts on tax policy and tax administration attended
these round tables, most of them actively participating in the

xm
debates. Among those who ahended, some as observérs, and
some as members of the Commission, were the following: ALE-
XANDRE KAFKA, BENEDICTO SILVA, BENJAMIN
HIGGINS (American), DUARTE PACHECO DE CASTRO,
FRANCISCO SÁ FILHO, GERSON AUGUSTO DA SILVA,
GILBERTO C. MOOG, GILBERTO ULHôA CANTO, GUI-
LHERME DEVEZA, HARRY C. REEN (American), JASPER
COSTA (American), JOHN KAUFMANN (American) , MARIA
DO CARMO SANTOS DIAS, NEWTON RAMALHO and
OTHOLMY STRAUCH.
The formal presentation of the «Shoup Reporb took place
at a meeting presided over by Ambassador ROBERTO DE
OLIVEIRA CAMPOS, then Acting Minister of the Ministry
of Finance. Present at the meeting were the following persons:
ALEXANDRE RAFRA, BENEDICTO SILVA, BENJAMIN
IDGGINS, EDUARDO LOPES RODRIGUES, FRANCISCO SÁ
FILHO, GERSON AUGUSTO DA SILVA, GILBERTO C.
MOOG, GILBERTO ULHÔA CANTO, GUILHERME DEVEZA,
HARRY C . KEEN, JASPER COSTA, JOHN KAUFMANN,
JOSÉ LUIZ BULHõES PEDREIRA, MARIA DO CAR-
MO SANTOS DIAS, NEWTON RAMALHO, OTHOLMY
STRAUCH, ROSENSTEIN RODAN and S E B A S T I Á O
SANT'ANNA E SILVA .
Even though it was prepared in a very short time (Profes-
sor Shoup had only four weeks to examine the basic legislation,
interview authorities and experts in the Finance Ministry and
write the text) the present report presents a fairJy comprehen-
sive picture of the shortcomings, inconsistencies and anachro-
nisms of the Brazilian tax system. It points out as well, under
the form of specific recommendations, the institutional mea-
sures that Professor Shoup prescribes to remedy the problems.
As he himself confesses, some of his recommendations are in
conflict with certain constitutional provisions, being conse-
quently infeasible unless the Brazilian Constitution is amended.
The Shoup Report enhances the series of published stud-
ies conducted by or under the auspices Df the Reform Com-
mission of the Ministry of Finance.
LUIZ SIMõES LOPES
President

XIV
 CONTENTS

FOREWORD .......... . .... . .. . .... . ............. . ..... .. .. . ... ...... XllI

INTRODUCTION 1
BACKGROUND AND SUMMARY 5

Background 7

A - The G overnment Sector's Share in the Brazilian Economy 7

B - Estimated 1965 Federal R evenue and Deficit 8
c- Estimated 1965 D eficits of Government Postal System,
Railroads, and Merchant Marine ... .. . ............ . ........ 10
D - Earmarked Revenues (Receita Vinculada) .. . . . . . . . . . . . . . . . . 11
Earmarked Revenues . ..... . . . ... . ..... .... ................. 12
E - Time Restriction on Vo ting New Taxes ....... ....... . ...... 15
F - Taxes and Quasi-Taxes Excluded from t h e Present Report .. 15

Sumnw,ry ... .... . .... .. ... . .................... .. .. . . . ...... . .... .. . 16

Summary of R ecommendations and Suggestions 17
PART 1 - THE INCOME TAX . . . ............ ..................... 25
The Income Tax .... ............. . ... . ..... . ..... . ..... ....... . . ... 27
A - The Personal Exemption .......... . . . .... . ... .. ............. 28
B - Exemptions for Spouse, Children, etc. . ... . .. . ........ . .... .. 30
C - The Schedular Rates . ............. ... ..... . ................. 30

xv
 D - The Progressive-Rate scale . . ... .... . . . . . . . . .... .. ... .. ... .. 32
E - Compulsory Loans on Individuais .. .. .. .. . . ... ..... .. .... . .. 34
F - Withholding a t Source on Wages and Salarles . ..... .. . ... 36
Incorne Tax for 1965 Based on the Salaries of 1964 . ....... . . 38
G - Family Incorne . . .... . . .. .. .. . ...... .. .. ... . . . ... ... .. . . . . ... 48
H - Non-business Deductions . .... . ..... . .... . .. .. ... ... . ...... . 49
I - Juridical-Person Inoome Tax . .. ... ... . ............. . ..... .. . 49
J - Sole Proprietorships and Partnerships . .. ........... . ..... .. 50
K - Inflation and the Taxation of Business Incorne .. .. .... . .. .. 52
L - Capital Gains and Losses . . . . . ........... . ... ... .. ... .. ..... 58
M - Excess Profits Tax 59
N - Transition to Pay-As-You-Go .. . .. .. .. . ... . . . . . . . .. .. .. . ... 60
O - Agricultw·al Incorne ... . ..... . ...... .. . ..... . ....... . . . . . .. .. 60
P - Incentives to Economic Development . ... ...... .. ..... .. . . . .. 61
Q - Foreign-Source Incorne 62

P ART II - THE FEDERAL GOVERNMENT'S CONSUMPTION

TAXES STAMP TAXES AND TAXES ON MOTOR
FUELS, etc. ... . .. .. . .. . .... ... . ... . ... .. ... .. . . . . . ... . .. . 63
The Federal Government's Consumption Taxes, Stamp Taxes and
Taxes on Motor Fuels, etc. . . . ............ .. . . .. . .. ..... .. .. . . .. . .. .. 65
A - Consumption Taxes . . . . .. . . . . .. . .. . . . . . . . . . . . . ... . . . .. . . . . . . 65
1. The Selective 30 per cent increase . ... . . . .. . . . . . ..... . . 66
2. Tobacco . . . . ....... . .. .. . .... .. . .. . .. . . ....... ....... . ... '37
3. Beverages 68
4. Producers Goods . .. . ... .. . . ..... . . ... ... . .. .. .. .. .. . . . . . 69
5. Services .. . .... .... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
B - Starnp Taxes 70
C - "Single Tax" (Impôsto Único) on Motor Fuels, etc. ... ... 70
PART III - THE NATIONAL TAX SYSTEM OF BRAZIL ... .. ... .. 73
The National Tax System 01 Brazil .. ... . ... ... . . ... ..... .. ......... 75
A - The Network of Federal, State and Local Fiscal Relations . . . 75
E - Remarks on Particular Taxes . . . . .. .. .. . . ... . .. .. ... . . .. .. ... 79
APPENDIX : Notes . . . .... . ... . . . ... . .. .......... . ..... . .. . ... .. . ... . . 81

XVI
INTRODUCTION
 The present report, made at the request of the Getúlio
Vargas Foundation, is divided into four parts.
The first part contains background material and a summary
of recommendations. It is followed by three numbered parts I,
n and m.
Part I deals with the income tax, special attention being
given to the proposals in the «Anteprojeto do Código do Im-
pôsto de Renda» (two volumes, July, 1964) by Dr. José Luiz
Bulhões Pedreira.
Part n is concerned with the Federal consumption taxes,
stamp taxes, and tax: on motor fuel and certain other sources
of .energy, in so far as these taxes can be altered without
amending the Constitution.
Part UI offers some suggestions for the tax: system of
Brazil viewed as a whole: federal, state, and municipal. Some
of the measures considered in Part III would require amendment
of the Constitution .
This report is based on (1) interviews with Brazilian Gov-
ernment officials, tax lawyers and accountants, and other in-
dividuaIs, (2) tax laws enacted in r ecent years, (3) the ad-
dresses given and cliscussions that took place at three round
t.ables in Rio in August and September, 1964, (4) working pa-

3
pers of the Commission on Refonn of the Ministry of Finance
of the Getúlio Vargas Foundation, (5) the «Anteprojeto» noted
above, and (6) certain other docwnents and papers . This report
has been written during my visit to Brazil, for this purpose, in
August and September, 1964. It is with more than usual plea-
sure that I gratefully acknowledge my indebtedness to Dr.
Octavio Gouvêa de Bulhões, Minister of Finance, Ambassador
Roberto Campos, Minister of Planning, and Dr . Luis Simões
Lopes, President of the Getúlio Vargas Foundation; to the
members of the Commission on Fiscal Reform, particularly
Professor Benedicto Silva, Dr. Gerson Augusto da Silva, Dr .
Guilherme Deveza, Professor Newton Ramalho, Dr. Gilberto C.
Moog, and Dr. J{)sé Luis Bulhões P edreira; to the members of
the Round Table on Tax Reform, particularly Professor Rubens
Gomes de Souza and Dr. Gilberto Ulhôa Canto; to officials and
consultants of the Ministry of Finance, especially Professor
Alexandre Kafka, Dr. Domingos Grello, Chief of the Cabinet
of the Ministry, and Snra. Maria do Carm{) Dias; Dr. Júlio
Barbieri, Director of the InternaI Revenue Department
and Dr . Orlando Travancas, Diretor of the Income Tax
Department; to M. Charles Taylor, of Price - Waterhouse;
to officials of USAID jBrazil, particularly Mr. Harry C. Keen
and Snra . Inéa Fonseca Campos; to my assis~ant on research
and staff arrangements, Arthur S. Xavier Ferreira, and to
the members of the secretarial staff: Arlette Muller, Carmen
Sylvia Martins, Giselle Muller, Helena de Britto e Cunha, Lúcia
Maria K . Sussekind, Odette Bernardini and Yedda Macedo.
To my colleagues from the United States, Mr. Jasper S.
Costa and Mr . Frederick J . Lawton, who took time from their
own assignments to assist me in many phases of this tax study,
I express my appreciation and thanks.

CARL S. SHOUP
BACKGROUND AND SUMMARY
 BACKGROUND AND SUMMARY

The background for this report concerns the share of the

government sector in the Brazilian economy (Section A), the
estimated 1965 deficit (B), the estimated 1965 deficits of the
Government Postal System, Railroads and Merchant Marine
(C), Earmarked Revenues (D) , Time Restriction on Voting
New Taxes (E), and Taxes and Quasi-Taxes Excluded from
the Present Report (F) .
The summary appraises the nature of the tax problems
as it appears, in September, 1964, and lists the conclusions
on tax policy that are reached in the several sections of Parts I,
II, and m below.

BACKGROUND

A - The Government Sector's Share in the Braz:ilian

Economy

Budgetary expenditures of the Federal Govemment in 1963

were apparently equal to about 15 or 16 per cent of gross do-
mestic product. Tax revenues were about 9 per cent, and total
ordinary revenues plus revenue from compuloory loans, about
10 per cent, of gross domestic product. These data do not
include social security taxes or expenditures, or the exchange
profit account.

'7
 The percentages for 1962 are almost the same. 1
To what extent these expenditure figures include transfer
payments, loans or grants to states and municipalities, and
deficits of government enterprises is not evident from the
sources at hand, but presurnably some such items are included,
since the largest spending department in 1963 was the Ministry
of Finance (36 per cent of the total) and the next largest, the
Ministry of Transport and Public Works (24 per cent).
The percentages would be appreciably larger if states and
municipalities were included. It is said that their tax revenues
account for about 45 per cent Df total federal-state-municipal
revenues. If this is so, total tax revenues would be about 18
per cent of gross domestic product, and total budgetary ex-
penditures, about 23 per cento Such percentages are lower,
at least on the taxation si de, than those of most European
countries and the U.S.A., but higher than those of many, if
not most, Latin-American countries.

B - Estimated 1965 Federal Revenue and Deficit

Of the Cr$ 3,000 billion budget receipts estimated for

calendar year 1965 in the Budget for 1965 (the fiscal year is
the same as the calendar year) , tax revenue, compulsory loan,
and fees account for Cr$ 2,938 billion, consisting of Cr$ 2,788
billion on current account and Cr$ 150 billion on capital
account . 2 This latter amount consists of Cr$ 121,560,000
thousand compulsory loan and Cr$ 28,310,000 thousand excess
profits taxo The compulsory loan proceeds are here lumped
with tax revenues, because of the compulsory feature and
because of the attitude of taxpayers toward compulsory loans.
In addition, the motor fuel tax and miscellaneous similar
taxes going chief1y to the highway fund outside the budget
may amount to some Cr$ 240 billion. 3 Total tax revenues
anticipated for 1965 may thus be estimated at ahout Cr$ 3,200
billion.

1 S ee Note 1, in A ppendix .
2 S ee N o e 2, Ül Appendix.
:I See Note 3, in Appendix.

8
 The share of this that comes from income taxation may
be estimated as follows . There is Cr$ 605 billion credited to
current revenue account, 4 plus an unspecified part of Cr$ 250
billion «estimated increase in collection of (alI) taxes» 5 due,
apparently, to rising prices, faster collection, and higher rates,
plus, finally, Cr$ 150 bHlion additional credited to capital
account under «credit operations », as explained above. G li
Cr$ 150 billion of the Cr$ 250 billion is income tax, the total
revenue from income taxation, including the compulsory loan,
for 1965 rnuy be estimated at Cr$ 905 billion. This is 28 per
cent of the estimated Cr$ 3,200 billion total tax revenue
(including ccmpulsory loan) . But the states and municipalities
collect tax revenue that will be perhaps from one-third to 45
per cent of total tax revenue (see Part l i below), hence
income taxation will account for some 19 per cent, or 15 per
cent, r espectively, of total federal, state and local tax revenue.
The Cr$ 905 billion estimate includes the 15 per cent cf
income tax share that is distributed to municip:üities (see Part
m below).
Apparently almost half the income tax will be collected
at the source, chiefly on individuaIs incomes, more than a
third from legal entities, chiefly corporations, on their profits,
and the remaining 10 to 20 per cent directly from individuaIs
filing returns. 7
Ccnsumption taxes (excise taxes), exclusive of the gaso-
line tax, are estirnated at Cr$ 1,487 billion for 1965 8 plus an
unspecified part of the Cr$ 250 billion increase in collections
noted above. If Cr$ 100 billion of this is aUocated to consump-
tion taxes, they can be estimated at Cr$ 1,587 billion, or about
50 per cent of the Cr$ 3,200 billion tax revenue. The figure
of Cr$ 1,587 billion includes the 10 per cent share that is
distributed to municipalities (see Part IH below) .
Stamp tax revenue is estirnated at Cr$ 241 billion, and
customs duties and allied revenues at Cr$ 151 billion. The

4 See Note 4, in Append ix.

;, See Note 5, in Appendix.
G See Note 2, in .Appe·r..dix.
7 See Nete 6, in Appendix .
H See ]I;·;,te 7, i:1 Appendix.

9
tax on electrical energy is estimated at Cr$ 44 billion. Fees
account for Cr$ 11 billion. o
Expenditures for 1965 are estimated at Cr$ 3,775 billion,
of which (1) Cr$ 1,160 bilüen are current operating expenses
(Despesas de Custeio) ; (2) Cr$ 1,534 billion are «transfer»
expenditures (Despesas de transferências), including transfers
to cover operating deficits of governrnent enterprises, and true
transfer payments such as pensions; and (3) Cr$ 1,081 billion
are capital expenditures, including Cr$ 577 billion for capital
outlays of government enterprises. The resulting deficit is
estimated at Cr$ 775 billion. But the Budget is said to reflect
only one-thid of thc financiaI operations of the federal sector;
the ether two-thirds are undertaken by the more or less de-
centralized, independent govemment enterprises (autarquia!>
and emprêsas mistas. 10 The Post Office does not fali in this
categery; its entire ex!)enditures are included in the Budget.
The 3 per cent tax on payrolls of legal entities introduced
by the law of July 16, 1964, Art. 2, is to be paid iuto the
Fundo de Indenizações Traba!histas ; this revenue is apparently
net included in the estimates above. This tax is considered
in the present repert as p art of the social security system,
on which no policy reccmmendations are offered. In any event
the net yield of this payroll tax wiU be less than its gross
yield, since the amounts of it that are invested in the indexed
bonds can be deducted in computing taxable income for thc
income taxo
The proceeds to come from the 5 per cent tax on revalua-
tion of fixed assets (see Part I-K below) are presumably
included in the total above.

C - Estimated 1965 Deficits of Govemment Postal

System, Railroads, and Me1chant Marine
,~1'" " .". ':,*,~'~;~!!'- ;;;'
'?jf 1
Postal revenues are estimated in the Budget for 1965 at
Cr$ 10,000,000,000, expenditures at Cr$ 157,640,010,000, of
which Cr$ 17,800,000,000 are capital expenditures. The deficit,

9 See N ote 8, in Appendix.

10 See Note 9, in Apper.dix.

10
 Cr$ 147,640,010,000, is 94 per cent of the expenilitures. 11 This
postal deficit is about equal to the estimate of import duties
for 1965 (Cr$ 151 billion), or nearly tWú-thirds as large as
total stamp tax collections.
Government railroads are estimated in the 1965 budget to
incur a deficit of Cr$ 290 billion (no details are given on
revenue and expenditure). 12 This deficit is about the same
size as the estimated r evenue from the corporation income taxo
The government's Merchant Marine and port deficit is
estimated (1965) at Cr$ 110 billion. 1:\ This is about equal to
the individual income tax collected other than at source.
The combined deficit of those three government enter-
prises is almost Cr$ 550 billion. Evidently, all income tax rates
coult be cut in half (at least), if these deficits were eliminated,
without increasing the budget deficit. Alternatively, consump-
tion tax rates could be cut by one third.

D - Earmarked Revenues (Receita Vinculada)

.... •" ,' .--- _'1"--:,\' :

A considerable amount of the Federal Government's tax

revenues are earmarked for specific purp oses. These allocations
are p robabIy not, however, a chief cause of the Federal Gov-
ernment's pr esent financiaI difficuIty, nor do they in general
seem tú be so large cr so irrational as to Iead to grave misal-
location of resources. This t endency to segregate particular
revenues to particular uses can easiIy be a buse d, and some
of the present earmarkings might be eliminated in recognition
of the potential dangcrs of this practice.
A fut of the earmarked taxes, fees, and cther revenues,
supplied by the Ministry of Finance in August, 1964 is re-
produced below:

11 Sce Note 10. in Appendix.

\~ Sec Note lI, in Appendix.

13 Sec N ote 12, in A ppe'lldix.

11
 EARMARKED REVENUES

rMPORT DUTIES

8 % of the total of the Import duties goes to the National

Port Fund
100 % of the Import duties on vehicles and parts goes to
Petrobras

CLEARENCE TAX

10% goes to the Federal Electrification Fund

15% goes to Aeronautic Fund
0,5 % goes to the Land-and-cattle Fund
3,5% to tbe Re-equipment of Custom houses
15% to the Naval Fund
18% to the Social Security Fund
32% to the Merchant Marine
6 % to tbe Concessionary of the Ports

EXCISE TAX

10% of the total goes to the Municipalities

4 % of the total to the Federal Electricity Fund
Automobiles - 100 % to Petrobras
Additional on beverages - 50 % for medicaI care

lNCOME TAX

15% of the total goes to Municipalities

Additional tax for family welfare - 100% for family,
allowance

STAMP TAX

10 % goes to Education and Health

5 % for the Social Pioneers

12
T AX ON LOTTERY

Raff1e - 60 % to subsidies
Sweepstakes - 100% to welfare

PENITENTIARY STAMP

100 % to the rebuilding of penitentiaries

SINGLE TAX ON ELECTRIC POWER

40 % to the Federal Electrification Fund

50% to the States, Federal District and territories
10% to the Municipalities

TAXES

Union Tax - 100% to the Social Fund

Lighthouse duties - 100 % to the Naval Fund
Racetrack - 70 % to the Commission on Breeding of
Horses
24 % to the Army Cavalry

INCOME FROM PUBLIC ENTERPRISES

Northeast Bank - 100 % for itself

National Steel Co. - 100% to the University of Brasilia
National Motors Factory - 100% to BNDE (National
Bank for Economic Development)
São Francisco Hydroelectric Power - 100 % to BNDE
Manaus Hydroelectric Co. - 100% to BNDE
PETROBRAS - 100% to itself
National Cold Storage Co. - 100 % to BNDE
National Railroad Co. - 100% to BNDE
National Insurance Co. - 100% to BNDE

18
 INDUSTRIAL INCOME FROM THE MINISTRY 0F' AGRICULTURE

100% to the Land-and-Cattle Fund

OTHER REVENUE SOURCES

Additional tax on income tax - 99% for economic de-

velopment
Taxes on Art. 3 L/1628 - 100% to service Economic
Development Certificates
Interest on OER - 100% to service the Economic De-
lopment Certificates
Payment of the agreement on art. 5(', law 1628 - 100%
to service the Economic Development Certificates

EXTRAORDINARY REVENUE

Additional on income tax - for Economic Development

Additional on legal entities profits - Social Security Fund.
Fuel Oil tax coUected by Bank of Brazil
10% to railroads 40% to Federal
90% to highways 48 % to States
12 % to Municipalities.

In addition to this earmarking of various taxes, there are

allocations of total tax revenue (not the revenue from some
particular tax) to certain types of expenditures. Article 169
of the Constitution requires that the Federal Govemment spend
each year at least 10 per cent (set at 12 per cent by a recent
law) of its revenue on education, and the state and local units,
20 per cento Article 29 of the transitional provisions of the
Constitution requires that 1 per cent of Federal tax revenue,
at least, be spent each year to develop the San Francisco River
Valley. Similar, but larger, allocations are required with respect
to certain other areas by Articles 198 and 199 of the Constitu-
tion (see Part moA below). This kind of allocation, if it
proliferates, can lead to an undue rigidity in budget allocation,

14
though not, as the earmarking provisions noted above do, in
tax structure.

E - Time Restriction on Voting N ew Taxes

Efforts to strengthen the fiscal system in the fight against

inflation are impeded by the following underlined portion of
Paragraph 34 of Article 141 of the Constitution, which reads:

«Nenhum tributo será exigido ou aumentado sem

que a lei o estabeleça; nenhum Sierá cobra-do em oada
exercício sem previa !lU1Jorizaçã.o orçamemtária, res-
salvada, porém, a tarifa aduaneira e o impôsto lan-
gado por motivo de guerra.»

Thus, no tax can be collected in, say, the calendar year

1965 unless it has been authorized in the budget which is
voted in the preceding year. In 1964, the consumption tax rates
could be increased (for the period July 1 - December 31,
1964) because the Constitution was amended for that purpose .
The increase in withholding rates in 1964 was not regarded as
an increase in tax, but simply a change in method of collection.
It would seem that repeal of the indicated portion above
is necessary if the federal fiscal system is to be used in a
timely manner, either to halt inflation or to check a depression.
Retroactivity is not the issue here; any taxes voted, in, say,
mid-year, could be non-applicable to the first part of the
year's income, or sales (though some power of retroactivity,
even, is probably desirable with respect to the in come tax).

F - Taxes and Quasi-Taxes Excluded from the

Present Report

Social security taxes are collected outside the Budget by

a number of more or less autonomous social security organi-
zations or funds, which also disburse the social security benefits.
Details on these inflows and outflows could not be assembled
for the present report; it is said that the current deficit on
these accounts aggregates to a few hundred billion cruzeiros.

15
 The differential exehange rates eontrolled by the Gov-
ernment result in an exeess of receipts that may be called
quasi-tax revenue. The burden is mueh the same as that of
a general tax on foreign trade. The present report does not
attempt to estimate the amount or ecmsequenees of this
quasi-tax.
Revenue from coffee retention fees is also not covered
here.

SUMMARY

Tax poliey in Brazil, in September, 1964, has two dimen-

sions. One of these eoncerns feasible time of enactment and
application. The other concerns the objective of each reform
measure - is it primarily to check the inflation, or is it pri-
marily for other purposes ?
The time dimension divides the possible reforms into three
groups: those that can be enacted within the next few months,
those that must await amendments to the Constitution some
time next year, and those that can be introdueed only gradually
over a period of years as tax administration improves.
The dimension of objeetives, as just noted, divides the tax
program into those measures that do, and those that do not, aet
directly to cheek inflation. Those that do not so aet are still
important even when control of inflation is the immediate goal,
for they influence the publie's respect for its tax system and
for its government's tax policy. When this respect is lacking,
active fraud and passive disregard erode the tax system and
eventually render even the most directly anti-inflationary tax
measures inoperative. The tax provisions that do aim directly
at controlling inflation are usually those dealing with large
amounts of revenue. Sometimes, however, they are simply meth-
ods that imply clearly that the governmert does not expect in·
flation to continue indefinitely. Instances will be seen below in
the arguments presented here against adapting the tax system
to live permanently with inflation, and against indexed bonds.
For the reader's eonvenience, the r~commendations and
suggestions made cr implied in Parts I, lI, and III of this report

16
have been extracted and assembled in the two dimensions of
time and objective, in the table following.
As it happens, the primarily anti-inflati<ln measures all
fali in time group nQ 1: those measures that can be enacted
during the remaining months of 1964. Hence the two-column
format used for the Group 1 recommendations is dropped for
Groups 2 and 3.
The brevity with which the measures are stated in this
summary table necessarily carries an air of dogmatism that
ia not, it is hoped, found in the discussion in Parts I, II, and III .

SUMMARY OF RECOMMENDATIONS AND SUGGESTIONS

MeaSUJ:lelS de.signed p:rimarily

To check inflation For other purposes

Group 1: Income Tax: (a) Increase allow-

ance for each depen-
Those that can (1) Lower the ba- dent from 3/8 of the
be enacted sic (single-pers<ln) basic exemption to
during the exemption to Cr$ . . 1/2 that exemption.
remainder 756,000, starting with starting with 1965
of 1964. 1965 incomes, adjust incomes (Part I-B) .
withholding scale ac- (b) Do not extend
cordingly (Part I-A). the 1963-1964 com-
(2) Raise the 3 % , pulsory indexed loan
5% and 8% bracket (Part I-F) .
rates to 10% , start-
(c) Repeal deduction
ing with 1965 in-
of preceding year's
comes (Part I-D).
income tax for com-
putation of current
(3) Put the progres-
year's taxable in-
sive-rate scale for
come of corporations
1965 incomes into
(Part I-I) .
terms of cruzeiros at
the same Bcale as (d) Allow revalu-
for 1964 incomes ation of inventories
(Part I-D). to 1964 price leveIs

17
 (4) Replace the com- free of tax, but retain
pulsory indexed loan traditional valuation
of 15 % to 25 % by a method from this
supplementary tax leveI.
designed to yield
(e) Repl!l.Ce excess
about half the rev-
profits tax by equiva-
enue of the loan, and
Lent revenue increase
expressed as a per-
in regular corpora-
centage of the entire
tion tax (Part I-N).
regular r.ax due (not
(f) Put corporate
of that part paid
income tax on
directly) and with
a current-payment
bracket rates (not ef-
(pay-as-you-go) ba-
fective rates) (Part
sis, over a three-
I-E) .
year period (Part
I-N) .
(5) Extend to the
full year 1965, at the
monthly rates for the
last half of 1964,
the withholding pro-
visions of the July,
16, 1964 law, Art. 12
(Part I-F) .

(6) Replace compul-

sory loan of corpora-
tions by an increase
in corporation in-
come tax of some-
what smaller amount
(Part I-I) .

(7) Raise the regular

rate on corporations,
for 1965 incomes
only, by say, 5 per-
centage points (Part
I-I) .

18
 (8) Do not allow
skipping a year in
transition of corpo-
rations to pay-as-you-
go basis (see Back-
ground - F). (Part
I-N) .

Consumption tax

(9) Increase tax

rates on cigarettes,
and distilled spirits,
effective as soon as
possible (Part TI-A).
(10) Extend the rate
increases of the Law
of August 28, 1964,
indefinitely (P a r t
lI-A) .

(11) If rate of infla-

tion has not greatly
decreased by Novem-
ber, 1964, increase
rates of consumption
tax by average of
100 per cent, as tem-
porary measure for
1965.

Stamp Taxes
(no recommendations)

Taxes on Motor Fuels, etc.

(no recommendations)

State and Municipal Taxes

(no recommendations)

1.9
 M:easures desigllied pl'imarily for purp(k§6S lo ther than
checking inflamn

Group 2 (a) Repeal present

income tax code and
Those that substitute code based
cannot readily on draft code of July
be enacted 30, 1964 (Dr. Bu-
until 1965 or lhões P e d r e i r a )
later, often be- after discussion and
cause amend- amendment. Som e
ment of the details follow:
Constitution is
required. (b) Repeal the nor-
mal (schedular tax-
es) a n d increase
progressive-rate sca-
le to recoup revenue
loss (Part I-C) .

( c ) Call in all bearer

shares and replace
them with nomina-
tive shares; forbid
issuance of bearer
s h a r e s henceforth
(Part I-F, Part I-L).
(d) Adopt modified
split for family in-
come (Part I-G).

(e) Repeal legal-en-

tity tax as to sole
proprietorships and
partnerships (Part
I-J) .

(f) Do not require or

permit revaluation of
fixed assets after
1965 (Part I-K).

20
 (g) Include capital
gains and losses
frem shares, real es-
tate, and other assets
in individual income;
adopt an averaging
device; and possibly
allow a slight reduc-
tion of tax (gains)
and tax relief (loss-
es) (Part I-L).

Consumption Taxes
(h) Give credit for
tax paid on purchase
of machinery and
other items not
now creditable (Part
lI-A) .
(i) Extend the con-
sumption tax to cer-
tain services, after
amending the Consti-
tution (Part lI-A) .

Stamp Taxes
(no recommendations)

Taxes on Motor Fuels, etc.

(j) Increase rates if
more revenues is nee-
ded for highway ex-
penditures .

State and Municipal Taxes

(k)Transfer export-
tax p o w e r from
states to federa.l gov-
ernment (Part UI-A).
21
 (1) Transfer rural-
land-tax power from
municipalities to fed-
era.l or state govern-
ments (Part UI-A) .
(m) Transfer death-
duties power froro
states to F ederal
Governroent (Part
TIl-A) .
(n) Allow state gov-
ernrnents to impose
certain overlapping
consumption taxes
(Part III-A) .
(o) Introduce for-
rnulae type grants-
in-aid: repeal present
sharing of income
and consumption tax-
es and the 30 per
cent rule for state
sharing with munici-
palities (Part ill-A).
(p) Reduce tax OD
transfp.r of real es-
tate to almost 1
per cent : (Part lI-B,
Part m-B).

General
(q) Repeal constitu-
tionaI provision re-
quiring tax rates of
ODe year to be voted
in the preceding
year (Background,
E) .

22
 Measures desi<gned primarily for purposes otiber tha'll
checkimg infIation

Group 3 Income Tax

Those that (a) Refine withhold-

cannot be made ing on wages and
fully effective salaries, using either
until adminis- USA ar UK methods,
tration is grea- ar a compromise
t1y improved (Part I-F).
though partial
(b) Give prompt re-
effectiveness
fund on overpaid tax
may in some (Part I-F, Part I-N).
cases be (c) Define rules on
achieved in
depreciation (Part
1964 or 1965. I-K) .
(d) Amplify regula-
tions on capital gains
a n d losses (Part
I-L).
(e) Improve assess-
ment of agricultural
incomes (Part I-O).

Consumption Taxes
(no recommendations)

Stamp Taxes
(no recommendations)

Taxes on Moto?· Fuels, etc.

(no recommendatiQns)

State and Municipal Taxes

(f) Replace state
turnover (cascade)

28
sales taxes with sin-
gle-stage or value
added taxes (Part
ID-B) .
(g) Reform assess-
ment of municipal
real-estate tax (Part
ID-B) .
 PART I

THE INCOME TAX

 a

THE INCOME TAX

As the data in the Background section above indicate, thc

income tax in Brazil supplies only a small fractioll of total Fed-
eral, State and Municipal tax revenues. The relatively high
personal exemption is one reason. Perhaps another reason is
the reputedly small number of incomes that fall in the middle
brackets, li indeed this is a fact. But one gains the impression
that the problem is above all one of administration, alI the way
from auditing taxpayers' accounts to facilitating payment cf
tax and to punishment for those who evade . The present report
does not go into detail on those issues (for example, to whut
degree should imprisonment for fraud be decreed?), since tech-
nical assistance on this aspect of taxation will be forthcoming
in the near future from those who are expert on this subject. It
can be said at once, however, that few if any of the measures
recommended below can prove useful if there is not a notablc
improvement in in come tax administration.
The following sections deal one by one with what appear
to be the major issues of income tax policy at this time.
A draft of a complete new income tax law has just been
presented (July, 1964) by Dr. José Luiz Bulhões Pedreira
to the study committee on tax reform (of which he is a
member) of the Getúlio Vargas Foundation, at the committee's
request. This draft, entitled «Anteprojeto do Código do Im-
põsto de Renda», and hereafter referred to as the «Project»,

27
 is designed to replace in its entirety the present series of laws,
amendments to laws, and amendments to amendments, which
in the view of some BraziJian tax lawyers is no longer possible
to work with adequately. The Project, besides being a com-
plete recodification, intreduces several new conceptual and
administrative ideas of importance, which will be noted in the
appropriate sections below .
A major question of income tax policy in Brazil for 1965
is whether a new income tax cede should replace the old laws,
and if 80, which of the novel features of the Bulhões Pedreira
draft should be incorporated in the new code . It is a difficult
decision, but the balance of advantage appears to lie with re-
peal of the oId law and introduction of a new code based on
the Bulhões Pedreira draft . Some modifications of that draft
are suggested in the section below .
A codification of income tax law is to be found in Decree
n 9 51 . 900 of April 10, 1963, published in the Diário Oficial
of April 17, 1963 . Important amendments are contained in
Law n 9 4 . 357, of July 16, 1964, published in the Diário Ofi-
ciaI of July 17, 1964.
The income tax system in Brazil consists of (1) normal
taxes, a series of flat-rate taxes on six different types of in-
come, hereafter referred to as schedular taxes, (2) a super-
imposed progressive-rate-scale tax on individuaIs. (3) a
compulsory loan, imposed by laws n'l 1.474 of November 26,
1951, and n 2 . 973 of November 26, 1956, based on the
Q

amount of income tax payable directly by the individual (that

is, after deducting the amount of tax withheld at source), (4)
a second compulsory loan, applicable to 1963 and 1964 wages
and salaries, deducted at source, (5) a profits tax on alI legal
entities, including sole proprietorships, partnerships, and cor-
porations, (6) a compulsoy loan on profits of alI these firms,
and (7) an excess profits tax on legal entities.

A - The Personal Exemption

Since 1961, the personal exemption and the limits of the
rate brackets of the progressive-rate personal income tax in
Brazil have been fixed in the law, not in cruzeiros, but in units
of «fiscal minimum wage».

28
 Thc fiscal minimum wage is the largest monthly minimum
wage in effect in Brazil (nonnally that for the State of Gua-
nabara), rounded off to the nearest thousand cruzeiros. The
monthly minimum wages have been changed by government
decree each year, more or less proportionally to the change
in the index of prices. 1 The most recent increase was from
Cr$ 21,000 a month to Cr$ 42,000 a month, effective for com-
puting tax on 1964 incomes.

The personal exemption for a single taxpayer is stated

by law to be 24 times the monthly fiscal minimum wage .
Hence for 1964 incomes it is Cr$ 1,008,000 . 00 (about
US$ 592 at the present free market exchange rate of 1700
cruzeiros to the doUar). In terms of internaI purchasing
power, Cr$ 1,008,000 may be more nearly equivalent to
US$ 800 or US$ 1,000. Apparently, not more than 10 per
cent of the income recipients in Brazil are legally liable to
pay income tax, under this exemption . 2

An immediate policy issue is whether more revenue

should be obtained froro the income tu by lowering the
exemption to, say, 18 times the monthly minimum wage, that
is, to Cr$ 756,000. Also, the question arises: will a new higher
minimum wage be decreed for 1965, with a consequent auto-
matic increase in the personal exemption?

It should be recalled that a decrease in the exemption

increases the amount of income tax due by all existing
taxpayers besides bringing in new taxpayers whose incomes
are below the old exemption .

In view of the great need for tax revenue, an immediate

lowering of the exemption to 18, or at least to 20, times the
fiscal minimum wage would seem to be warranted.

If a higher minimum wage is decreed for 1965, much of

the force of the lowering of the exemption will be lost unless

1 See Note I - A, 1, in Appendix.

2 See Note I - A, 2, tn Appendix.

29
the exemption is continued in cruzeiros terms at Cr$ .. . .
1,008,000.00, discarding the wage-unit as the measuring rod
for the exemption.

B - Exemptions for Spouse, Children, etc.

The schedular taxes allow no deduction for spouse,

children, or other dependents. This disal10wance works a
hardship on large families, which can be avoided by consoli-
dating the schedular taxes into the progressive-rate global
taxo
For this progressive-rate tax, tbe law (Decree 51.900,
Art. 20) allo\Vs a personal exemption for the spouse one-half
that of the basic exemption. For 1964 income, therefore, a
married couple receives an exemption of Cr$ 1,008,000.00 +
Cr$ 504,000.00 = Cr$ 1,512,000.00. An additional 3/4 of thc
spouse's exemption is allowed for each minor or invalid son,
unmarried daughter, widow without support or wifEi abandoned
by husband without support, minor or invalid descendents
without support from their parents . Hence, for each of these
persons, the taxpayer obtains an exemption of 3/4 of Cr$
504,000.00 or Cr$ 378,000.00.
If the basic exemption of Cr$ 1,008,000. 00 is lowered, to
obtain more revenue, these other exemptions could be lowered
proportionately. The fractions, 1/2, and 3/4 of 1/2, are pro-
bably suitable, especially if the regime of split family income is
adopted as proposed by the Project (see Part I-G below) ,
although consideration might be given the increasing the
allowance for each dependent írom 3/8 of the basic exemption
to, say, 1/2.

c- The Schedula.,. Rates

Income is classified among eight schedules, six of which

are subject to normal (schedular) tax rates (Art. 25, Decree
n Q 51. 900) :

30
,., .
Schedule A :

S chedule B:
Intercst on g..::ver.ilrnent obligaUons

Certain other interest

3 per cent

10 per cent

S chedule C: Wages, salaries 1 per cent

S chedule D: Professional fees, etc. ( self-em-

ployed) 2 per cent

Schedule E : Renis, etc . 3 per cent

S chedule F: Dividends, certain interest pay-

ments, profits of business firms no schedular tax; le-
gal entity t .ax already
paid (see Part I_I
below)

S chedule G: Earni'ngs from cx tractive indus- no schedular tax (tax

tries, farming, cattle raising, relief)
eic.

Schedule H : Certail1l miscellaneollS investment 5 per cent

income and isolated transactions
by thcGe not merchants .

The task of deciding into which schedule a particular

kind of income should go is not always a simple one. The
reader is referred to the lengthy description of the several
schedules in Articles 2 to 10 of Decree n~ 51.900.

The differences in the schedular ratcs were important,

relatively, when the global income tax rates were low. They are
no longer of much importance, except for the difference
between 1 per cent on wages and salaries and the 5 and 10
per cent rates on certain investment incomes . If a distinction
in favor of wages and salaries is desired, it can be obtained
by an earned-income deduction under the global tax . lf the
schedular taxes were abolished, a certain amount of adminis-
trative effort could be transferred to more important tasks
in in come tax administration. The Project of Dr. Bulhões Pe-
dreira therefore appears to be sound in its proposed repeal
of the schedular taxes . The rate scale of the progressive-rate
income tax could be raised do make up the revenue lost by repeal
of the schedular taxes.

81
 D - The P1'ogresslve-Rate S cale

Since 1961, as noted above, the brackets of the progressive

rate scale of the individual income tax have been set in tenns,
not of Cruzeiros, but of so many t imes the fiscal (monthly)
minimum wage.
For 1963 incomes and 1964 incomes the scale is (Art .
26, Decree n'l 51 . 900) :

Up t o 24 times the fiscal minimum wage : Exempt

From 24 to 30 » » » 3%
» 30 to 45 :. 5%
» 45 to 60 » » » 8%
» 60 to 75 » » » 12%
» 75 to 90 :. » 16%
» 90 to 120 » » » 20%
» 120 to 150 » » » 25 %
» 150 to 180 » » » 30 %
» 180 to 250 » » » 35 %

» 250 to 350 » » » » 40 %
» 350 to 450 » » » » 45 %
» 450 to 600 » » » » » 51 %
» 600 to 800 » » » » » 57 %
Above 800 » » » » » 65 %

A part of this tax is collected at the source . The remain-

der is paid by the taxpayer the next year, upon receipt of a
bill from the tax administration.

The rates in the lower brackets are so low (3 % , 5% , 8 %)

that they must yield little revenue compared with the adminis-

32
trative burden that is involved. The rate scale could begin
with, say, 10 per cent or 15 per cent without hardship to the
low-income taxpayers, since the personal exemption could be
set at a leveI that would prevent hardship for the income
classes in question . If the need for additional tax revenue is
great, it would appear that the personal exemption could be
lowered somewhat (see above) and the starting rate set at,
say, 15 per cent, especially if the schedular taxes were abol-
ished. A tax credit could be granted for earned income, if
desired.
The rate scale above, when translated into cruzeiros at
the fiscal minimum wage of Cr$ 42,000 a month, becomes:

Up to Cr$ 1,008,000.00 .. , . .................. ... ..

Above Cr$ 1,008,000.00 to Cr$ 1,260,000.00 ........

°3%
» Cr$ 1,260,000.00 to Cr$ 1,890,000.00 .. ... ., , 5%

» Cr$ 1,890,000.00 to Cr$ 2,520,000.00 • • ••• o •• 8%

» Cr$ 2,520,000.00 to Cr$ 3,150,000.00 • •• o' ••• 12 %

» Cr$ 3,150,000.00 to Cr$ 3,780,000.00 ...... , . 16 %

» Cr$ 3,780,000.00 to Cr$ 5,040,000.00 ••• o' o •• 20 %

» Cr$ 5,040,000.00 to. Cr$ 6,300,000.00 o •• o' •• • 25 %

» Cr$ 6,300,000,00 to Cr$ 7,560,000.00 · ....... 30 %

» Cr$ 7,560,000.00 to Cr$ 10,500,000.00 • •••• o •• 35 %

» Cr$ 10,500,000.00 to Cr$ 14,700,000.00 ••• o •• , • 40 %

» Cr$ 14,700,000.0 to Cr$ 18,900,000.00 '" •• o •• 45 %

» Cr$ 18,900,000.00 to Cr$ 25,200,000.00 .. .. . ... 51 %

» Cr$ 25,200,000.00 to Cr$ 33,600,000.00 · ... , .. . 57 %

» Cr$ 33,600,000.00 .. ..... . .. .. . . .. ............ 65 0/0

33
 These rates are bracket rates, not effective (average) rates.
They do not show what percentage of an individual's income
is taken in taxes . The bracket rates are the significant rates in
estimating the incentive effects of the tax (incentive to work,
incentive to take investment risks); the effective (average)
rates are the significant ones for appraising the degree of
hardship caused by the tax o For example, a single individual
with a yearly taxable income, after all deductions, of 150 times
the monthly minimum wage is paying a marginal rate of 25 %
on the highest part of his income, but an effective (average)
rate of only 13.22 per cent on his entire in come : Cr$ 832,860
tax on Cr$ 6,300,000 of income. This is the annual salary of
a fairly sucessful accountant, ar a fairly high-Ievel civil servant
(see Part I-F below) .

If the fiscal minimum wage is raised again, the brackets

change, of course, in terms of cruzeiros, with consequently
smaller revenue than otherwise, in nominal terms. li the indi-
vidual income tax is not to lose an appreciable part of its present
power to check inflation, the present cruzeiros brackets will
have to be retained, for 1965 incomes, which means that either
the fiscal minimum wage will have to remain unchanged in
1965, or the income tax law will ha ve to be changed to suspend
ar remove the minimum-wage unit for the brackets. In any
event, as soon as stabilization is achieved, elimination of the
minimum-wage unit for the brackets would be testimony that
the government believed the stabilization was not merely
temporary.

E- Compu lsoTy Loans on IndividuaIs

Under laws enacted in 1951 and 1956 (see above) the

individual income taxpayer is subject to a compulsory loan of
from 15 per cent to 25 per cent of the amount of income tax
that remains for him to pay after withholding. The scale for
the compulsory loan is as follows:

84
 Income tax remaining Compulsory loan,
to be paid after with- computed as percentage
holding of such income tax

Cr$ of such tax

Above
° to
20,000 to
20,000
250,000
none
15%
Above 250,000 to 1,000,000 20 %
Above 1,000,000 25 %

These rates are effective rates, not bracket rates. li one's

tax is Cr$ 20,000, one pays no compulsory loan. If it is Cr$
20.001, one pays Cr$ 3,000.00 compulsory loan. The taxpayer
with an income slightly above the amount that results in non-
with-held tax of Cr$ 20,000 would be well advised to reduce his
income and thus increase his welfare, unless he viewed thc
bonds as worth what he had to pay for them.
For 1963 and 1964 income years, an additional compulsory
loan, collected at source on wage and salary incomes, has been
in effect. The rate is 3% per cent a month on the excess of
the monthly wage or salary ever the monthIy perSQnal exemp-
tion and allowance for dependents.
Until recently, these «loans» were not indexed and evident-
ly were regarded by most taxpayers as being about equivalent
to another tax. Even as indexed loans, they carry a strong
tax eIement, which may be measured roughly by what the
individual would be willing to pay outright tax in order to be
free of the compuIsory loan requirement. Moreover, a. govern-
ment that issues indexed loans at a time when its own financiaI
policy is causing prices to rise is thereby storing up difficulties
for the years ahead; the very issues of indexed loans may,
beyond some point, make fulfillment of the index promise
impracticable, as the amount to pay in current cruzeiros be-
comes too large to be politically or socially acceptabIe.
The injustice of basing the earlier loan on onIy that part
of the income tax not withheId is not fully counterbalanced by

35
the second loan deducted at source on salaries and wages. The
graduation of the first lcan by entire income rather than by
brackets of income has severe effects at the dividing points.
In view of these facts a simple fiscal system and a feeling
of increased equity among taxpayers could be achieved by re-
pealing the compulsory loan provisions and making up most
of the loss in revenue by an evenly distributed increase in
inccme tax rates.

F - Withholding at Source on Wages and Salaries

Until July, 1964, withholding of income tax on wages and

salaries had been at a low rate, at or slightly above 1 per cent
for most employees. The July 1964 law (Art . 12) imposed a
much heavier withholding tax <ln salaries and wages, ranging
up to 10 per cent on monthly wages or salaries of more than
15 times the fiscal minimum monthly wage, as follows:

Up to 4 times the fiscal minimum wage: former withholding rate

Above 4 times to 5 times the fiscal minimum wage: 2%
Above 5 » » 8 » » » » » 4%
Above 8 » » 10 » » » » » 6%
Above 10 » » 15 » » » » » 8%
Above 15 times the fiscal minimum wage: 10 %

This provision is effective only from July 1, 1964, to De-

cember 31, 1964.
If the taxpa~r's return filed in 1965 shows he has been
subject to excess withholding, he can credit the excess against
tax on 1965 income or can apply for a cash refundo
The significance of this new withholding schedule can best
be seen by some illustrative examples derived from data
supplied by the Ministry of Finance, and reproduced below.
These illustrations are not quite complete in that they do not

36
include the second compulsory 10an referred to in Section E
above, withheld in 1964 ou 1964 wages and salaries.

The «deductions» stipulated in these examples are set at

leveIs that would not be unusual for such taxpayers.

These ilIustrations assume that the new, high withholding

rates of the Law of July, 1964, are in effeet for the fuIl twelve
mcnths of the taxpayer's iucome year, instead of the aetual
1964 experience which consists of (1) withholding at the
low rate mentioned above for January to June plus (2)
withholding at the new high rate, July to December . This
full-year assumption of high-rate withholding is ma de in order
to present the burden that would exist if the present withholding
rules were maintained throughout a year. In other words, we
may view these examples as showing what would be the burden
on 196·5 incomes provided the rate sehedule w.ere unehanged
and the withholding rates were maintained for all twelve
mopths of 196·5 . That part of the tax payable direetly by the
taxpayer (not colleeted at source) can be thought of as being
paid by him in 1966 .
Taxpayers A and B might be, for example, bank clerks in
the middle or upper grades . Taxpayers C and D might be fairly
suecessful accountants or fairly high-Ievel civil servants. Tax-
payers E and F represent the highest paid civil servants. Tax-
payers G and H are largely figments of the imagination; they
have been selected to show what tax would be payable by an
employed individual if bis salary were so high that it put him
in the top (65 % ) braeket .
Taxpayers A and B pay much more than half their total
tax plus loan by withholding (and it must be recalled these
data do not inelude the second eompulsory loan, which is
collected at source). So does taxpayer D. But C (no children)
pays about half through withholding. Taxpayer E pays about
44 per cent through withholding, even though his income is
very high (over Cr$ 10,000,000 a year); his counterpart F (no
ehildren) pays 50 per cent through withholding. The hypo-
thetica1 G and H taxpayers would pay only 21 per cent and 22
per cent, respe ctively, through withholding .

8'7
INCOME TAX FOR 1965 BASED ON THE SALARIES OF 1964

Taxpayer A

Married, no childl'en
SaJary Cr$ 300,000.00 per month

S chedule C Cr$ 3,600,000.00

Deductions . .. . . ........ .... ... .... ... Cr$ 3( 0,000.00

Net earnings .. .... . ............ . .... CrS 3.210,000.00

ScheduJar tax - 1% . ..... ... . . . . ..... . .......... . .. Cr$ 32,100.00

Gr: ss income ( net earni ngs of

schedule C) ..... .... ..... . Cr$ 3,240,000.00

Wife allowance . . . ... . . Cr$ 504,000.00

Other dedu ction'S Cr$ 324 ,000.00 Cr$ 828,000 .00

Net income ........ . .. . .. . .... . . ..... Cr$ 2,112,000.00

Complementary tax . . . . . .. . .. .... .. . .. . . . . .. . . .. ..... Cr$ 80,820,00

Total t 3X ... . ...... . . .. . . . . .... . .. . .... .. ... . .... ... Cr$ 113,220.00

Tax withheld at the source ... .. . ......... . .. . ....... Cr$ 75,200.00

Balance of tax to be paid in 1965 Cr$ 38,020.00

C.mpulsory loan to be paid in 1965 ( a percentage of the

immediately preceding item) .. .. ....... . ........ Cr$ 5,700.00

Total to be paid in 1965 on 1961 inoome ............. Cr$ 43,720.00

Total tax plus 15% - 25 9/; compulsory Joan .. . . .. . . . . Cr$ 118,920.00

38
 L

Taxpayer B

Married, two children

Sala.ry Cr$ 300,000.00 per month

Schedular tax .. ... .. . ...... .. .. .. . ... ........ . ...... Cr$ 32,400.00

Gross incomc as above. .. . . .. ... . .... Cr$ 3,240,000.00

Fam~ily al1Mva.llces:

Wife . Cr$ 504,000.00

Childl'en . . .. ... . .. .. Cr$ 756,000.00

Cr$ 1,260,000.00

Other deductions ..... Cr$ 321,000.00 Cr$ 1,584,000.00

Net income ........ . .. .. ....... . .. . .. Cr$ 1,656,000.00

Complementary tax . .. . . . . . ............. . .... . ... .. .. Cr$ 19,260.00

Total tax . .... . ... .. ........ . ......... . .. . ... . ....... Cr$ 51,660.00

Tax withheld at the source ... .. .... . .. ... .. . .. .. ..... Cr$ 34,908.00

Balance of t·a x to be paid in 1965 . . . . . . . . . . . . . . . . . . . . . . Cr$ 16,752.00

Compulsory los.n to be paid in 1965 (none, because immc-

diateJy preceding item is bel o'w Cr$ 20,000. ) O

Total tax plu-s 15% - 25 % cOlnpulsory l oan Cr$ 51 ,6EO.00

39
 Taxpayer C

Married, no children
S a la ry Cr$ 500,000 . 00 per m onth

S : h edule C Cr$ 6,000,000 .00

Deducti cns . ... ..... . ........ . ... .... Cr$ 800,000.00

Net earnings ... . ...... ... ... . ... . . . . Cr$ 5,200,000.00

ScheduJar tax - 1 % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... Cl'$ 52,000,00

Gross incomc (net caI"'nmgs of s che-

dule C) ................... . ... .. Cr$ 5,200,000.00

Wife a ll(1\','ance .. .. . . Cr$ 504,0(»).00

other deductions . .. . .. Cr$ 396,000.00 Cr$ 900,000.00

N et income ... . .... ... . ....... . ... . . .. Cr$ 4,300,000.00

Com pleanentary tax Cr$ 369,860.00

Total tax ...... . .......... . . . .. ..... . . ..... . ........ Cr$ 421,860.00

Tax withheld at the source ...... .... . . . .. . . . ..... ... Cr$ 229,788.00

Balance or ta:< to be paid illl 1965 ........ . .. ...... . ··· Cr$ 192,072.00

Compulsory Joan to be paid in 1965 (a percentage úf the

immediateJy preceding item) .. . . ... . ........... .. . Cr$ 28,800,00

Tot al to b e paid in 1965 on 1964 inwme... . . . . . . . . . . .. Cr$ 220,872.00

'rotat tax plus 15% - 25% compulsory lo·a,n . . . . . . . . . .. Cr$ 450,660.00

40

•
 Taxpayer D

Married, two children

Salary Cr$ 500,000 . 00 per month

Sch edular tax ... . .. . .. ........... . . . . . . .... . .. ... . . . Cr$ 52,000.00

Gr :s'S income as above . .... . ... . . ..... Cr$ 5,200,000.00

Wife . . .. . .. . .. .... . . Cr$ 504,000.00

Children . .... . . . . .. . . Cr$ 756,000.00

Cr$ 1,260,000.00

Other deductions Cr$ 640,000.00 Cr$ 1,900,000.00

Net income ..... . . ...... . ... .. .. .. . .. Cr$ 3,300,000.00

CJ mplementary tax . ......... . .. . ... .. . . . .. ... . . .. . .. Cr$ 189,060.00

'I'otal tax .... . .. .. . .. ... .... .. ........ . ...... . . .... " Cr$ 241,060 .00

Tax withheld at the sourCe .. . . ...... . . ... . . . ... . . . .. Cr$ 189,468.00

Ba.lance of tax to be paid in 1965 . . . . . . . . . . . . . . . . . . . . . . Cr$ 51,592.00

Compulsory loan to be paid in 1965 (a pel'centage of the

immediately precedi.ng item) ......... ............ . Cr$ 7,700.00

Total to be paid in 1965 on 1964 income .... ..... ... .. . Cr$ 59,292.00

Total t-ax plus 15% - 25% ~ompulsory l~ an . . . . . . . . . .. Cr$ 248,760.00

41
 Taxpayer E

Married, no children
S31ary Cr$ 850,000.00 per rnonth

Schedule C Cr$ 10,200,000.00

Deductions Cr$ 1,200,000.00

N et eal'nings Cr$ 9,000,000.00

Schedular t ax - 1'lc.. .. ............. .. ... . . ... . ..... Cr$ 90,000.00

Gross incOt."11e (net eal'nings of Sche-

dule C) ..... .. . ....... . . .. .... . . . Cr$ 9,000,000 .00

D Dd ncti ons:

Wife aJlowance Cr$ 504.,000.00

O lher deductions ... .. Cr$ 936,000.00 Cr$ 1,44.0,000.00

Net income .. . ... ... ..... ... ....... . . Cr$ 7,560,000.00

C ;,mple'm entary t ax ................................ . . Cl'S 1,210,860.00

Total tax ........ . ...... .. . .. .......... . .... .... ... . Cr$ 1,300,860.00

Tax withheld at the source .... ...... .... .. .. . . ... .. " Cr$ 618,588.00

BalanCe of tax to be paid in 1965 ... . . . ............. " Cr$ 682,272.00

Compulsory ~()a n to be paid in 19€5 (a percentage of the

immediately preceding item) ......... . . . .. ... . ... . Cr$ 123,900.00

To ~a l to be paid 1.:1. 1965 on 1964 in come . .. . .. . . . . . . .. Cr$ 806,172.00

T~ t] l tax plus 15 % - 25% compulsory loan ..... .. .. . . Cr$ l,4U,760 .00

42
 Ta xpayer F

.
Mar ried , two children
Salary Cr$ 850,000.00 per month

Schedular tax . . . .. .. .. . . .. . . . . . ... . .. .... . . . ..... . .. CrS 90,000.00

Gross incJme . .... . ... .. .. . . . . . .... . . Cr$ 9,000,000.00

D cduc t lQH8 :

Wife . . .... ... ... . . .. Cr$ 504,000.00

Children . . ... .. .... . Cr$ 756,000.00

other dedu ctions .. . .. Cr$ 940,000.00 Cr$ 2,200,000.00

Net inc0111e ......... . ...... .. . . . .... Cr$ 6,800,000.00

Complementary tax ....... . . . .. .. . . ....... .. . .... ... Cr$ 982, 860.00

Total tax .. ...... . ..... ... .. .. . .. .. ....... . ...... .. Cr$ 1,072,860.00

Tax ...vithheld at the source . ... ... ..... . . . . . ...... . . . Cr 578,268.00

Balance of tax to be paid in 1965 ..... .. . .. . , , . . . . . . .. CrS 494,592.00

Compuls ~ Joan to be paid in 1965 (a percentage of the

immediately precedi'n g item ) .... . ............. .. . . Cr$ 86,400.00

Total to be paid in 1965 c n 1964 income. ... . . . . . . . . . .. Cr$ 580,992 .00

Tot3.1 tax plus 15 % - 25% {!om puJs()TY Joan .. . . . . . . . . . Cr$ 1,159,260.00

43
 Taxpayer G

Married, no children
Salary Cr$ 3,500,000.00 per month

ScheduJ e C Cr$ 42,000,000.00

~uctions Cr$ 5 ,000,000.00

N ct earnings .. . ..... . ...... ... ... Cr$ 37 ,000,000.00

Schedular ~ax - 1 % ........ . .... . ...... . ......... . Cr$ 370,000.00

Gross income ( ~et earnings of Sche-

dule C) .. ... .. . ............... Cr$ 37,000,000.00

L ess :

Wife allowance Cr$ 504,000.00

Other deductions Cr$ 1,596,000.00 Cr$ 2 ,100,000.00

Net inccrn e . .... .. ... . .. . ......... Cr$ 34,900,000.00

Complementary tax ................ . .... . ...... . ... Cr$ 14,1:55,800.00

Total tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cr$ 15,025,800.00

Tax withheld at the s :: urce ...... . ...... . . .... . . . . . . Cr$ 3,798,588.00

Balance of tax to be paid in 1965 .. ..... . . . ....... .. Cr$ 11,227,212.00

Compul9-:JoI'Y loan to be p3 ~d in 1965 (a percentage of

the immediately precedi.ng item) Cr$ 2,744,300.00

Tolal to be paid in 1965 on 1964 income .. . .... . .. . Cr$ 13,971,512.00

Total tax plus 15% - 25% compulsory loan ........ Cr$ 17,770,100.00

44
 Taxpayer H

Marrled, two children

Salary Cr$ 3,500,000.00 per month

Schedular tax .... .. . .. . ......... . .... . . .. ... . ..... Cr$ 370,000.00

Gross inc: me as above .... . . ...... Cr$ 37,000,000.00

Less;
Fami-ly a,zzowamc/J

(Wife ar..d two children) Cr$ 1,260,000

Other deductions ... .. Cr$ 2,000,000 Cr$ 3,260,000 .00

Net income . ... ... . .. .... .. . . .. .. CI'$ 33,730,000.00

Ocun plementary tax . . .. .. . . . ... .. .. . .. ... . . . .. . .. o. Cr$ 13,895,300.00

Total tax o . o o •• • o • •• • o • o o • • o • o • • • •• •• ••• • • 0 • •••• • o. Cr$ 14,265,300.00

Tax withheld at Ule source . o •• • o • o o •• o • •• •• •• o •• o o o Cr$ 3,758,268.00

Ba lance of tax to be paid in 1965 . o o • o o o o o •• •• •• • o. Cr$ 10,507,032.00

Compulsory lean to be paid in 1965 (a percentage of

the immediatel,y preceding item) . .. Cr$ o • o • • • • • • • • • • 2,564,200.00

Total tJ be paid in 1965 on 1964 income o •• o • • • • • • •• Cr$ 13,071,232.00

Tot:ll tax plus 15% - 25% compulsory I·OM .... . ... Cr$ 16,8:ae,500.00

45
 The amounts withheld under Art. 12 of the J u1y 1964
law are thus so large, relative to the total tax due, that they
are powerful gurantees of reduction in income tax evasion
by any wage earner or salaried mano Evidently, the fight
against inflation will be substantially aided if these withhold-
ing provisions, which expire December 31, 1964, under present
law, are continued on into 1965.

The amounts withheld, in these examples, are withheld

in a six months period (July-Decerober inclusive, 1964). The
percentage rates of withholding should presumably be con-
tinued through the twelve months of 1965 .

The cash drain on salary and wage recipients during the

period July-December 1964 is even larger than the data above
indica te. Many of t hese individuaIs are paying substantial
taxes on 1963 incomes, since the withholding rates in force in
1963 wer e so low.
FinaIly, the aroounts withheld for social security funds
have not been taken into account in the computations above.

No estimates are available, as this is written, of the

additional amount of revenue expected froro the new high
withholding rates of the July, 1964 law.

Withholding can be at a flat rate of tax, with aIlowance

for family status, as in the United States; unemployment
during part of the year wiIl then usuaIly result in overwithhold-
ing, and a refund of some tax the foIlowing year. Or, alter-
natively, withholding can be geared closely to the employee's
pattern of earnings during the year, taking account of periods
of unemployment, and also of non-business deductions and
outside income; in this system, the cumulative amount withheld
by the end of the year almost exactly equals the total tax due,
and the employee generally does not need to file a returno 3
A conscious choice between these two systems, or some rational
combination of them, seems desirable: the present system in
Brazil does not quite fali into any of these categories. This

3 See Note I - F, 1, j,n Appenclix.

4G
is a reform that can be postponed until stabilization has been
achieved.
In the event of overpayment through withholding, or
current estimated tax payments (see Section N below), the
taxpayer could be given the choice, always, between crediting
the overpayment against the next year's tax, or receiving a
cash refund within a few months. From a psychological point
of view, there is nothing better calculated to persuade the
taxpayers that the income tax is being fairly administered than
willingness of the Government to pay a prompt refund of
over-paid taxo
\Vithholding on incomes other than wag.es and salaries
exists for securities, capital gains tax on real estate sales,
income arising in Brazil but flowing to non-residents, and,
apparently, in a few other cases. The withholding provisions
are scattered through the laws and are said to be some times
hard to find. Perhaps the withholding provisions can be con-
solidated, and extended to types of income they do not now
r.each - rentals, f.or example. If the schedular taxes are
repealed, and only one, progressive-rate individual income
tax remains, the withholding rates will need to be revised
and refined .

Withholding on dividends on bearer securities is at a very

high rate, about 75 per cent, if the cwner chooses to remain
unidentified when collecting a dividend declared by the com-
pany. He is not expected to report such dividends in his
declaration of income . If he elects to identify himself. the
withholding rate is much lower, about 30 per cent, for then
he can be discovered if he fails to report the dividenrls in
his return of income. Despite the high rate, many holders of
bearer shares or bearer obligations elect to remain uniden-
tified. Many corporations are still family concerns, and retain
in the business mcst of the profits; only a small portion, if any,
is taxed as dividends. Concealment also enhances the possibility
of evading death duties (levied by the States, in Brazil).
Concealment is also worth a high price (in withheld tax) to
those who fear polítical and social unrest . These latter two
reasons, perhaps, explain the large amount of nonidentification

47
that persists; confidential Finance Ministry data made
available to the present writer show that several widely held
corporations have bearer shares outstanding whose holders
opted on dividends paid so far in 1964, out of 1963 profits,
for non-identification by a large majority (in terms of per-
centage of shares, not percentage of stockholders). In four
out of the five companies examined, this percentage was over
50 per cent: in one case it reached 80 per cento In the fifth
case it was only 13 per cent.
Recently, the income tax law added the requirement that
each individual income taxpayer include in his annual return
a statement of his assets and liabilities. If this provision is
effectively enforced, nonidentification when collecting div-
idends will be of less value to the taxpayer. Inquiry by the
present writer indicates that it is too soon to ascertain whether
this listing requirement is being fulfilled, and if so, whether at
values that are merely historical cost data 01' otherwise
unrelated to current mar}{et values.
If bearer shares could be abolished, ma.ny vexing income
tax problems could be avoided. Besides the matter of dividends,
and death duties, there is involved here the taxing of capital
gains (see Part I-L below) .

G - Family Incorne

The Brazilian personal income tax rule for family income

is basically that of a joint return for husband and wife, with
certain exceptions. It seems unfair to require two persons
living together to pay considerably more income tax than two
single persons, as often happens under a joint return system
and progressive rates.
The Project proposes that the split-income regime (now
in force in the United States, Germany, and, with children
counting as one-half adult each, in France) be adopted in
Brazil, except that in the upper leveIs of income the split
would be not fully 50-50. Under the 50-50 split the incomes
of the spouses are aggregated; income tax is computed on
one-half that income; this tax is multiplied by two. The saroe

48
effect can be employed by applying the progressive rates to
brackets that are twice as wide for a married couple as for
a single person, and this is the technique of the Project .
Splitting less than 50-50 can be achieved by using brackets
that are less than twice as wide for the married couple as for
the single person . This is the modification used by the project
for upper-income groups. It is somewhat less favorable for
the married couple than is the 50-50 split (brackets twice
as wide) .
The split-income principIe proposed by the Project is much
more equitable than the existing system . It would be prefer-
able, however, to allow scmething less than a 50-50 split at all
leveis of income, to take account of the fact that imputed in-
come (non-money income) created by the housewife's work
in the home is not taxed under the income tax. The brackets
for the married couple would be something less than twice as
wide as the brackets for the single person, at all leveis of
income .

H - Non-business Deductions

Deduction of certain expenses not arIsmg directly in the

process of obtaining the taxable income is allowed for pur-
poses of the prcgressive rate tax (Chapter VII, Decree n')
51. 900) . . They do not include any taxes paid, to any levei of
government, and there are ceilings on the aggregate deductable
of certain of the deductions, notably interest on personal debts,
life insurance premiuns (itself with two ceilings), casualty
losses, and ccntributions . No specific comment is offered here
on these provisions; they seem in general to be reasonable .

I - Juridical-Person Income Tax

Corporations and similar organizations pay a tax nominally

of 23 per cent, plus 5 per cent ( = 28 per cent) on 196-3 and
1964 profits. So too do partinerships and sole proprietorships,
except that the rate is reduced to 5 per cent, plus 5 per cent
for 1963 and 1964 ( = 10 per cent) for certain professions
where a small amount of capital is employed. Small concerns

49
may elect taxation on estimated profit!3 (see Section I - J
below) .
The true rate of basic tax is not 23 per cent, but only 18.6
per cent, for a concern with a stable real income. This is so,
because the law allaws deduction of income tax paid this year,
on last year's income, in computing this year's taxable in-
come. 4 To this may be added the extra 5 per cent: the total
income tax cn legal entities is thus 23.6 per cent, not 28 per
cent, for concerns with stable real income. In a period of great
inflation, however, when nominal taxable profits are rising
rapidly, this deduction provision is of less value, and the true
rate lies somewhere between 23.6 per cent and 28 per cent.

A compulsory loan of 15 per cent of the 23 cent, if regard-

ed -as in large part a tax, brings the cumulated rate of legal
entity tax to a nominal maximum of 31 .45 per cent. For a
concern with a stable real income, the compulsory loan is 15
per cent of 18 _6 per cent, not of 23 per cent, and hence equals
2.790 per cent of income, not 3.45 per cent. For sue h a
concern the maximum cumulated rate is 26.39 per cent, not
31 .45 per cent .
There seems to be no good reason for continuing to allow
deduction of income tax paid in computing taxable income; the
result is chiefly to mask the true amount of tax being paid.
Computing the real rate of tax is even more complex than
indicated above, since the excess profits tax paid, if any, is
aIso deductible in computing taxable income. Since the present
report suggests that the excess profits tax could well be
repealed (see Part I-M below), this aspect of computing the
true tax rate is not explored here.

The Project proposes two desirable reforms in the taxation

of legal entities: (1) it takes sole proprietorships outside the
category of legal entities (it might go even further, here . See
Part I-J below); and (2) consolidates the rates into a single
rate, abolishing the compulsory loan.

• See Note I - I - 1, in Appendix.

50
,' , . If more revenue is needed, the rate on corporations
°might be raised to somewhere between 35 and 40 p er cent on
ao real basis, without unfavorable economic effects.
To be sure, aI; long as dividends remain fully taxable
imder the individual income tax, as they are now, overtaxation
of corporate profits wiil result. On the other hand, retained
profits which, if declared as dividends would go to high-income
stockholders, will remain undertaxed Eventually, this vexing
o

problem of over and under-taxation can be reexamined, and a

more refined system adopted.

J - Sole Proprieto?'ships and Partnerships

Sole proprietorships (firmas individuais) and partllerships

(sociedades em nome coletivo) as noted above, pay a separate
income tax, as do corporations. The distributed profits of these
enterprises are then included in the proprietor's incomes for
the progressive-rate tax. There is no schedular tax on these
profits All of the profit of a sole proprietorship is presumed
o

to be distributed. Only those partnership profits that are in

fact distributed are included in the partners' individual income
tax returns o

Since the rate of tax on business firms is about 27 per

cent (see Part I-I above), the burden on low-income sole
prcprietors might soom to be grossly excessive, and so it
might be, if it were not for (1) the option open to small fit-ms
to be taxed at 8 per cent of gross receipts and (2) evasion.
Most of the small sole proprietors used to opt for the 8 % on
sales regime (to be 12% in 1965), but the law's definition
of «small» ha~ not kept pace with inflation Presumably o

many truly small concerns are legally liable for the regular
taxo But it may be doubted that their records, if any, are
accurate enough, cr the enforcement strict enough, to make
this tax a reality.
These problems would be partly a voided by adopting
proposaIs noted above, but there remains the task of assessing
these profits to the individual income taxo This is largely
an administra tive matter, hence not considered further here,

51
except to observe that aU income-taxing countries have
difficulties with small business firms, none solve the problem
completely, and some do much better than others.

A third method of assessing profits tax is open to the tax

administrator if the proper records have not been kept:
certain percentages may be applied to gross receipts, or to
fixed assets and receivables, ar capital .
Simplicity and equity would probably both be served by
exempting proprietorships and partnerships from the legal
entity tax and requiring owners to include in their individual
taxable incomes their shares in the year's profits.

K - Inflation and the Taxation of Business Income

The price leveI in Brazil is expected to continue to rise
substantial1y in 1964 and 1965 until stabilization is achieved.
though the rise will, it is planned, be at a much less rapid rate
than the recent~y prevailing one of 80 to 100 per cent a
year . Still, the rise in prices will be enough to inflate the
reported profits of business firms. Part of these reported
profits, computed under historical-cost depreciation and con-
ventional inventory accounting, will be of a kind that the
business firm will want to reinvest in stocks (inventories),
accounts receivable, and cash - in general, in working cap-
ital - and in replacing fixed assets, so that the firm wiil
not have to shrink in a physical sense. If the income tax
takes a large part of reported profit, the business concern
must go to the capital market and borrow, or seU shares, or
obtain credit from its suppliers, to get the money it needs to
continue just on the same physical leveI Df operation. The
tax drain may thus pose a serious problem for the business
firm in a period of inflation.
The present income tax law avoids IDoSt of this tax draio
with respect to fixed assets of business firms (juridica}
persons) but not with respect to inventaries, accounts receiv-
able and cash (aside from the excess profits tax).

52
 It allows, indeed it requires, every legal entity to write
up fixed assets each year, within four months from the end
of its fiscal year, to a eurrent value by applying coefficients
stipulated by the National Economic Council. The depreciation
rates are applied te this new, high value. The business firm
pays a price, however, for this privilege: a 5 per cent tax on
the inerease in value, or, at the business firm's option, a 10
per cent purchase of indexed bonds having a maturity of not
less than five years. On the liabilities side, the capital account
is increased by the amount of the revaluation. These provision
were introduced by Law n9 4.357, of July 16, 1964, Art. 3
(Art. 1 describes the indexed bonds).
Inventories are still to be valued, for the ordinary tax, in
the conventional manner under th e existing law, that is, not
using «lifo » Oast-in, first-out) or base-stock methcds. The
result, in a period of rising prices, is to include in taxable
profits the increase in value of inventories that is due simply
to the increase in price leveI. Taxing away part of this profit
wiil make the firm unable to continue to hold the same phys-
ical volume of inventories, unless it can inerease its accounts
payable, or its loans from banks or other creditors. Perhaps
trade credit and bank credit are so easy to obtain in Brazil at
the present time that this taxation of inventory profits does not
prevent firms from continuing or expanding their physical
volume of business. Perhaps some firms do in faet compute
their profits on a «lifo » basis, without correction by the tax
authorities . Yet it would seem that, if there is a problem
here with respect to fixed assets, there must also be one with
respect to inventory.
To be sure, it is somewhat inequitable t() allow owners
of fixed assets to claim depreciation on current value, rather
than on historical cost, and thus gain tax exemption from
«papen profits, as long as owners of eash, bonds, and other
money claims are not allowed a deduction for the real lesses
they suffer by inflation . The owners of assets that do appre-
ciate in money value are better off than owners of assets that
do not appreciate in money value, and sheuld pay more taxes
than the latter. This equity end can be aehieved either by (1)
taxing the owners of the appreciating assets on their «paper»

53
gains and doing nothing as to owners of cash, etc . , or (2) not
taxing the «papen gains and allowing a deduction to the
holders of cash, etc. The present law does meet the equity
argument partway as to fixed assets by the 5 per cent tax.
As to inventory, etc . , it follows the equity argument complete-
ly, using method (1) above.
Evidently, this method (1) poses a conflict between
equity and the financiaI needs of the business firm (unless
credit is very easy to obtain). Method (2), no taxation of
paper gains and a tax reduction for real losses, is too sophis-
ticated for public acceptance . The state must therefore either
tax paper gains (by requiring use of historical-cost deprecia-
tion and conventional accounting methods), or ignore the
equity argument . The course it should take will depend on the
seriousness of the economic consequences of taxing papel'
gains, and the seriousness of the social consequences of ignor-
ing the equity considerations . In Brazil at the present time
the economic consequences probably have to be given some
priority. The 5 per cent tax is a reasonable compromise.
There remains the question, what to do about inventories.
Some compromise here, too, should probably be adopted; for
example, «lifo» accounting, with a 5 per cent tax on the
difference between book value and current cost of inventory,
or, alternatively, some partial-reserve method.
In the Project, Dr. Bulhões Pedreira has developed a
revaluation plan that emphasizes chiefly the equity aspect,
though in a novel way . This plan, contained in pages 88-94
of the Project, may be explained by a few hypothetical extreme
examples.
Example I: A corporation has only fixed assets (let us
assume that working capital needs are negligible) \o"ith a his-
torical cost of Cr$ 10.000.000,00, purchased entirely with equity
capital of Cr$ 10 .000 .000,00. The price leveI has tripled. In the
Project's fonnula, the fixed assets would be written up to
Cr$ 30.000.000,00, giving rise to a credit of Cr$ 20.000.000,00 and
the equity capital would also be written up, giving rise to a debit
entry of Cr$ 20,000,000.00. The credit and debit entries would
offset one another, hence no taxable income would result from

54
the revaluation. The concern would gain the advantage of de-
preciating on the new, high, Cr$ 30.000.000,00 base, but would
pay no tax like the 5 per cent tax now in force.
Example TI: Same as Example I, except that the concern
has purchased the fixed asset entirely with borrowed money
(let us suppose that the equity capital is negligibly small) .
The fixed asset is revalued as in Example I, but no revaluation
is allowed of the Cr$ 10,OCO,000.00 debt. Hence the creàit
entry is Cr$ 20,000,000.00; the debit entry, zero; and taxable
income of Cr$ 20,000,000.00 results. The taxpayer enjoys the
new depreciation base of Cr$ 30,000,000.00, but must pay tax:
on Cr$ 20,000,000.00, on the grounds that he has benefitted
at the expense of his credito r, and should pay tax on that
benefit.
However, the tax impact on the borrowing firm is soft·
ened by allowjng part of the net revaluation gain to be taxed
as a capital gain (a proportion equal to the proportion that
sales of capital assets during the year are of total capital
assets) and by including only one-tenth of the remaining net
revaluation gain in ordinary taxable income that year. The
remaining nine tenths would be taxed over the remaining nine
years, unless, as might happen, net revaluation losses in later
years offset this potentiaIly taxable gain. The revaluation
loss could occur as follows :
Example nI: A corporation has only working capital,
consisting one-third each of inventories, accounts receivable,
and cash (let us assume that fixed assets are negligibe). Tbe
working capital has been purchased entirely with equity cap-
ital of Cr$ 10,000,000,00. Inventories are valued on the con-
ventional first-in, first-out basis; and hence rise in value
with the price leveI. The price leveI triples. N one of the
working capital is revalued by formula, but the inventory
account and, no doubt, accounts receivable also, rise wjth the
price leveI . Cash on hand may not: if it does not rise, working
capital increases to Cr$ 10,000,000 (inventories) plus
Cr$ 10,000,000 (A/R) plus Cr$ 3,333,333 .33 cash, or a total of
Cr$ 23,333,333.33.

55
 On the liabilities side of the balance sheet, equity capital
is revalued to Cr$ 30,000,000.00. A revaluation loss of
Cr$ 6,666,666.67 is posted to the monetary correction account
and can be used to offset revaluation gains.

Example IV: Same as Example lII, except that the

working capital has been purchased entirely by debt (let us
assume that equity capital is negligible) . No reva1uation of
the debt is allowed. A revaluation gain of Cr$ 13,333,333.33
has occurred.
The equity issue here may be undel'stood by imagining
an economy of three persons, A, B, and C, in two periods of
time, Period I, when the price leveI is 100, and Period li,
when it is 300. In Period I, A has cash, Cr$ 10,000,000.00
and so does C . B has nothing. B borrows Cr$ 10,000,000.00
from C and purchases a fixed asset . A spends his own
Cr$ 10,000,000 . 00 on a fixed asset.
In period TI, we find that A has neither gained nor lost,
in real terms. B whose net worth was zero in Period I, is
worth Cr$ 20,000,000.00 in Period TI. C, the creditor, has a
debt worth Cr$ 10,000,000.00 in Period II cruzeiros . His orig-
inal cash, Cr$ 10,000,000.00 of Period I , was worth the equiv-
alent of Cr$ 30,000,000.00 in Period II cruzeiros - that
is, he cou1d have bought goods, services, etc. in Period I
that would cost Cr$ 30,000,000.00 to buy in Period TI. But C
has in fact only Cr$ 10,000,000.00 in Period TI (the loan).
Hence he has suffered a real 10ss of Cr$ 20,000,000.00 (in
Period II cruzeiros) . This just equals the real gain, in Period II
cruzeiros, that his debtor B has obtained at his expense.
Hence we have
Real gain, measured in Period II
cruzeiros
A
B °
20,000,000.00
C 20,000,000.00

Since A is better off than C, and B is better off than A,

tax equity calls for taxing A more than C, and B more than A.
Alternatively, we could say, let C be given a tax refund, let A
pay no ta.x, and let B pay a tax.
The Project distinguishes between A, B, and C in this
manner (if they are corporations) and hence meets this equity
test. But the equity formula does not always give the relief
where it may be needed to keep the business concern going.
B is taxed on revaluation, but where is he to get the money
to pay the tax? By selling the asset he bought with borrowed
mone y? This would serve the ends of tax equity, but it would
put B out of business (and someone else into business) . Or
perhaps B could new easily borrow some more on his asset .
The usual conflict remains, between equity and the difEiculties
that may arise from a shortage of cash to pay the taxo5
Probably the economy would benefit if the govemment
refrained from taxing inventory profits, even when obtained
by borrowed money, in the present type of inflation .
A more fundamental issue is: should a new income tax
law, designed to replace the old law entirely, contain any
revaluation provisions at all? An argument against doing so,
and one that appeals to the present writer, is that such pro-
visions, if permanently in the law, seem to imply that serious
inflation (or deflation) will again be permitted sometime, and
that such implying is unwise, politically and socially. Since
the revaluation problem for the current inflation has already
been rough1y solved as to fixed assets by the law of July,
1964, it might be better simply to add some temporary provi-
sicns for inventaries, and then draft the entire new income tax,
for adoption say in 1965, on the assumption of stabilization.
Depreciation, as noted above, can now be based on the
revaluation figur·e, instead of nominal cost . But only the
straight-line method is permitted, and that one method is
applied with unusual rigidity: a standard rate of 10 per cent
a year must be used with a few ·e xceptions (for instance,
motor cars), and except for special provisions for exhausting
assets, chiefly mines and, curiously, forests.

5 To be sure, no more ~han one-ter.th of B's tax would have too be paid
immediately, under the Project's formula,.

57
 Evidently, a much more realistic depreciation policy is
needed, both to avoid gross undertaxation, on long-lived
assets, and overtaxation on short-lived assets. A double de-
clining balance method (first year's rate twice that of the
straight-line rate) might be allowed, at least for certain types
of assets. The government is now empcwered to allow accel-
erated depreciation in areas and industries that in its opinion
should be favored but there is also needed the more realistic
approach to depreciation in general.

L - Capital Gains and Losses

The present law includes as ordinary income gains from

sales of capital assets, including securities, by any legal entity,
but only (by the Law of July 17, 1964) after revaluing the
basis by the price index. IndividuaIs are taxed on capital gains
only with respect to real estate; this feature was introduced
in 1946 to curb real estate speculation . Taxation of gains in
sale of shares cannot be achieved, as a practical matter, until
bearer shares are prohibited (see Part I-F above) .
Perhaps the greatest single improvement over the present
income tax law in the Bulhões Pedreira Project is its consistent
treatment of capital gains and losses. One may disagree with
the project's proposal to treat gains . and losses in a separate
compartment under a proportional rate, but at least the
Project defines them carefully and makes no arbitrary dis-
tinction between business firms and individuaIs. The Project's
provisions for capital gains and losses are interwoven with its
treatment of revaluation, but can be separated from them
without much difficulty if the revaluation provisions are not
accepted.
In place of a separate proportional rate, which is designed
largely to compensate for the bunching-up in one year of gains
that may have accrued over several years, a eloser approach
to true averaging that might be considered is the following .
The realized gain, or loss, would be divided by the number of
years the asset had been held. The tax on the year's income
including this fractional part of the gain, or 10ss, would be
computed and compared with the tax computed without con-

58
sidering the gain <lr loss. The difference in tax would be mul-
tiplied by the number of years the asset had been held . The
resulting tax, or minus tax, would be added 'to, or substracted
from, the tax computed by ignoring the capital gain or loss.
If for some reason a still more favorable treatment were
desired for gains, and a less favorable <lne for losses, the
resulting tax or minus tax could be reduced by an arbitrary
percentage.
The existing tax on real estate gains, introduced in 1946,
is oddly enough collected at the source . No reason is evident
for requiring the buyer to pay the tax; real estate can be
sold only by means of a deed executed before a notary public,
hence the tax authorities should be able to find, and collect
money directly from, the seller.
Sooner or late r, if individual capital gains and losses are
included, the law, or regulations, will need to be amplified to
care f<lr such matters as corporate reorganizations, corporate
distributions, and dividends in stock, to name but a few.

M - Excess Profits Tax

The tax on excess profits, levied on all legal entities above
an exemption leveI, has a rate scale of 20 per cent on that pari
of profit that is from 100 to 150 per cent of basic profit, 30
per cent <lf that part from 150 to 200 per cent of basic profit
and 40 per cent on that part of profit in excess of 200 per
cent of basic profit.
The taxpayer has a choice of methods of computlhg basic
profit; the choice is in fact between 25 (or 30) per cent of in-
vesfment and certain percentages of gross receipts.
The tax 10st most of its «excess» asoect under inflation,
until the compulsory revaluation of assets (July, 1964 law) ,
which allows the capital to be written up correspondingly.
Even ',Vith this readjustment, the definition of «excess » is
a difficult one. It should, ideally, vary from industry to indus~
try and even from firrri to firm, depending on degree <lf risk
faced. The administra tive effort that would be needed to
develop a true excess profits tax could better be devoted to
improving the regular corporation income tax. Repeal 01 the

59
excess profits tax seems therefore to be indicated, at least
from economic and administrative considerations o The revenue
lost from repeal of the excess profits tax could be recouped
by an increase in the ordinary corporate income tax o

N - T1'ansition to Pay-As-You-Go

Even if withholding at source is extended to its utmost

(see Part I-F above) complete pay-as-you-go will not be
achieved until (1) corporations are required to pay their entire
tax in estimated quarterly installments as the profit accrues,
instead of in the fcllowing year as at present, and (2) indi-
viduais are required to supplement withholding by paying the
balance of their tax on a similar estimated basis o In both
cases, of course, a final return after the elose of the year
would account for the balance of tax due or would claim a
refundo
Complete pay-as-ycu-go would have been especially helpful
to the Treasury in the recent years of inflation o A stop-gap
measure (July, 1964 law) requires revaluation of amounts due
as the price leveI rises o Immediate enactment of complete
current payment would make that part of the revaluation
procedure largely unnecessary, and would be useful, in applying
fiscal policy tax decreases ar increases to counter depressions
or excessive booms o
The measures proposed by the Project in this area (in-
cluding withholding) warrant serious consideration; they con-
stitute one of the major contributions of the Project o

o- Agricultural Income
Income of large-scale agricultural enterprises is apparently
taxed quite lightly, in part because of the use of an estimated
in come based on capital values that have been set by the
states of land taxation o Normally, agricultural enterprises
are not incorporated and they are not merchants under the
commercial law, h ence they have the right to opt for this
estimated meth od on income taxation o
The state-set land values have in many, if not most cases,
lagged far behind t he inflationary rise of prices o Some values

6Q
are said to have remained unchanged for the past twenty
years . Landowners, well aware of this taxing process, are
said to urge that states raise their land tax rates rather than
their Iand values if they must have more tax money.
Agricultural enterprises are exempt from the schedular
taxes (see Part I-C above) .
An appreciable source of income tax revenue seems at
hand here, if (1) the large agricultura I concerns (including
cattle-raising firms, etc.) that presuma bly keep books for
their own infc.rmation are required to disclose those data
for income tax purposes, and (2) the others are taxed on
up-dated values.
Collection at source (from purchasers of agricultural pro-
duce) could be seriously considered for seme sectors of ag-
riculture (on this point, see the Project) .

P - Incentives to Economic Development

The greatest incentive any tax system can give to eco-
nomic development is to be so definitely worded and so
impartially administered that each investor and each business
finn can know in advance what bis own tax obligations will
be and can have assurance that his competitors will b e
compelled to fulfill their obligations.
Incentive to inv:est has been referred to above with respect
to depreciation (S€e Part I-K) and capital gains and losses
(Section L). The tax law aIso provides special treatment in
other respects for investments in certain underdeveloped areas
of the country. Whether any more such tax reliefs are needed is
a question to be decided only after a case-by-case study . In
general, such privileges are likely to be costly ways of obtaining
the desired result; often, much of the investment for which
relief is given would have occurred without the relief. Still,
tax relief may be preferable to case-by-case subsidy if the gov-
ernment does not wish to participate directly in the decision
making process with respect to each individual act of in-
vestment.
Incentives to save, sometimes confused with incentives to
invest, are much more difficult to arouse by tax measures. A

61
 tax that exempted alI saved income (for instance, a grytduated-
-rate expenditures tax) would, for the average household, in-
crease the incentive to save only by the interest that could be
earned on the delayed tax, for those savers who save now in
order to consume later. Those who save to accumulate indefi-
nitely are usually so in love with economic power that the tax
saving is probably of minor importance as an incentive. An
expenditure tax that was promised to be temporary - for
instance, to last only five or ten years - would indeed be a
strong inducement to save, if the government's promise were
believed.
Corporate incentive to save might be stimulated by a
lower tax rate on undistributed profits. But much of that cor-
porate saving would merely replace saving that would have
been done by individual stockholders from their dividends,
especially in corporations closely held by wealthy families.
Meanwhile the government would have had to make up the
revenue loss elsewhere, perhaps out of other's potential savings.
Ability to save, as distinguished from incentive to save, is
of course increased by lowering taxes on those who have so
much income that they tend to save a large proportion of
ftirther increments of disposable income : this group includes
corporations of the type noted above. Here, considerations of
equity and accumulation may conflict. Not much can be said
on this subject without more study of available data, and more
data, on income distribution and distribution of the tax bill by
income classes.
In general, the biggest step that can be talten at present
toward economic growth in Brazil · seems to be a rewording
of the income tax code and an improvement in tax adminis-
tration.

Q - Foreign-Source Income
Brazil's in come tax applies to foreign-source income of
residents . Much, if not most, of tms income apparently is not
reported for the taxo Whether much revenue would be gained
if it were reported is not c1ear, in view of the provisions for
avoiding double taxation. The issue is mentioned here chiefly
as an item for further study in the years ahead.

62
 PART TI

THE FEDERAL GOVERNMENT'S CONSUMPTION

TAXES, STAMP TAXES, AND TAXES ON MOTOR
FUELS, ETC
THE FEDERAL GOVERNMENT'S CONSUMPTION
TAXES, STAMP ,TAXES, AND TAXES ON MOTOR
FUELS, ETC

A - Consumption Taxes

The Federal commodity taxes collected from manufacturers

are legally taxes on the consumption of merchandise, since the
Constitution reserves taxes on sales to the States (Arts. 15,
19) . In fact, of course, they are sales taxes. They are lmposed
on a long list of commodities at various rates.
If a taxed commodit y is used up directly in the production
of another taxed commodity, the tax paid on the first
commodity can be credited against the tax due on the second
c-ommodity. The commodity taxes thus amount to a system of
value-added taxation in t he manufacturing sector. (The French
general sales tax uses much the same technique to avoid cumu-
lation of the tax) .

Exports are exempt, and a tax credit is given on account of

taxes paid at earlier stages. Services are not taxed, since
Art. 15 of the Constitution reserves to the Federal Govemment
the power to tax only corummption of mercadorias (merchan-
dise) .
The States' sales taxes (see Part m below) also do not
tax services; only the municipal business tax reaches them,
indirectly,

65
 The relative importance of the several Federal commodity
taxes is shown by the following estimated yields for 1965 in
the 1965 budget (before the projected 30 per cent increase
explained below) . 1
Cr$ billions
Tobacco 402
Metals and metal products 173
Textiles 170
Beverages 121
Automobiles, bicycles, etc . 99
Electrical equipment 61
Chemicals 60
Paper and paper products, etc. 42
Plastics 41
Machinery 39
Processed foodstuffs 36

Total 1.487

The item, «Paper alld paper products, e~c. » , excludes certain

paper, since art. 31, V, (c) of the Constitution forbids the
Federal, State or Municipal Governments to levy any tax on
«paper destined exclusively for the printing of newspapers,
periodicals or books».

1. The Selective 30 per cent increase

The Law of August 28, 1964, increased the tax rates on a

considerable proportion of the taxed goods by 30 per cent, but
left unchanged the rates on one of the most important revenue
components: the tax on tobacco. This tax appears capable of

1 See Note II-A-l, in Appendix .

66
yielding more revenue than it now does as explained below.
Other exemptions from the 30 per cent increase in rates include
foodstuffs, drugs, footwear, trucks, buses, ambulances, etc.,
and roasted and ground coffee.
The Federal Govemment will benefit only to the extent
of 50 per cent of the additional revenues from this Law of
August 28, 1964: one-half of the additional revenues goes to
the States. It will be recalled that the States were already
getting 15 per cent of the revenue from the consumption taxes.
Moreover, these rate increases expire December 31, 196·4, by
terms of the August law. To check inflation it appears necessary
to continue the new rates indefinitely. Moreover, if the rate
of inflation has not greatly decreased by mid-November, 1964,
it would seem advisable to increase the consumption tax r ates
by, say, 100 per cent for a period of one year (1965) in an
attempt to stem inflation by still heavier taJ~ation .

2. Tobacco

The tobacco tax revenue comes almost entirely from ciga-

rettes. The cigarette tax is collected from the manufacturers,
but its rates are based on retail prices. Those rates are 60 per
cent per pack of 20 or less costing mcre than Cr$ 100 at retail,
and from 45 per cent to 55 per cent on paclrs costing less . The
retail prices are fixed in the tax law and are printed on the
cigarette package.
The rates are based on the price including tax. For exam-
pIe, a certain brand of cigarettes with a fixed retail price of
Cr$ 225 per pack of 20 pays a tax of 60 per cent of Cr$ 225
or Cr$ 135. This is equivalent to a tax cf 150 per cent ')n lhe
retail price excluding tax.
The InternaI Revenue Division is in favor of r eplacing this
system by one designed to impose the same tax burden but
with increased efficiency and increased sale cf cigarettes. The
tax would still be collected from the manufacturer, but would
be expressed as a percentage of the manufacturer's price rather
than of the retail price. Moreover, it would be based on the
price before tax, not on the price including tax. For both

67
 -
these reasons tbe tax r ates wouId have to be bigber, nominally,
than the present tax rates; they wouId have to be from 180 per
cent to 220 per cent on manufacturer's price excluding taxo
For exampIe, if a retaiIer in Rio sells a certain brand at
Cr$ 250 (within ~he range of price fixed by law) and keeps
a 10 per cent profit, the manufacturer now gets Cr$ 225 out
of which he must pay Cr$ 150 tax (60 per cent of Cr$ 250).
Under the proposed system he would seU to the retailer for
presumably, about Cr$ 75 before tax, and would pay a tax
of 220 per cent of Cr$ 75 OI' Cr$ 165 - almost the same as
the present tax of Cr$ 150. The retail price of cigarettes
would no longer be fixed; retailers would be free to charge
whatever competition would allow .
The argument for t11is change in system i8 that retailers
in remote are as of Brazil are unwilling to handle cigarette8
because the fixed retail price does not leave enough margin
after unusual transportation and other costs in such areas.
If the tax were based on the manufacturer's price and if retail
prices were left to find their own leveIs, consumption of ciga-
rettes in the more remote areas would, it is said, increase, and
80 too, tax revenues.
Although the present tax rates on cigarettes are much
higher than on other articles, they are not far above those in
the United States, where rates equivalent to 100 per cent 01'
more of the retail price excluding taxes are fairly common.
In the United Kingdom the tobacco tax i8 far heavier than in
Brazil. The tobacco tax i8 not very equitable, but in a period
when more tax revenue is urgently required, exemption of the
tax from th.e recent 30 per cent general increase in rates may
be guestioned.
3. Beverages

Most of the beverage tax revenue has come frem the beer
tax of 30 pei' cent ou brewer's, price raised tOo 39 per cent by the
Law of A 19ust 28, 1964 . This 39 per cent is perhaps equivalent
to 25 por cent on the retail price. While this is not a high rate,
most cou.ntries likewise tax beer Eghtly, in view of its wide-
epread consump:ion among the poor, and its 10w alcoholic
contento

68
 Distilled spirits, domestically produced, are taxed lightly
in Brazil. The most popular of these drinks is a clear liquid
resembling vodka in appearance, but made from sugar cane.
It is known as cachaça, or more succinctly «pinga», and is
sold in bars at Cr$ 50 a shot; one so disposed is said to be able
to get reasonably drunk at a cost of only Cr$ 350. The tax is
10 per cent of the price at the distillery . Apparently other
distilled spirits (not imported) are also taxed lightly. In any
event, the estimate for revenue f rom all beve rage taxes, includ-
ing beer, is only Cr$ 121 billion, or only some 4 per cent of
total Federal tax revenues. This is less than is usually obtained
by countries that do not rely h eavily on the income tax o If
adm.lnistrative conditions permit, a heavy tax on domestic dis-
tilled spirits might be a reasonable source of new tax revenue.
Domestic wine also pays only 10 per cent on the producers'
price. This tax, too, might be considered for an increase.
Soft drinks are taxed 10 per cent, at the manufacturers
leveI. Mineral waters are free of tax except for a small J..:!vy
for the Ministry of Mines.

4. Producers Goods

As the tabulation above shows, much of the «eonsumptio11

tax » revenue comes from taxation of producers goods, including
machinery and semifinished goods. To this extent the federal
eonsumer tax system r esem bles a general sales tax.
The tax on machinery cannot be credited against thc tax
011 the pr oduets made with the aid of the machinery. Hence
the tax contains some bias against capital-intensive methods
of production. The tax rates on machinery, however, are said
to be relatively low .
5. Services

An untapped field of considerable importance for Federal

Revenues is that of services . If the Constitution were amended
so that the Federal Government could include services in its
consumer tax, without having to give up part of the yield to
the States and localities (see Part In below), perhaps a hundred
billion or more of revenue could be obtained.

69
 B - Stamp Taxes

The stamp taxes are levied at various rates on various legal

acts, documents, etc. It is not known how much of the revenue
comes from each category of transfer or act, but evidently most
of the yield is from stamps sold to banks, insurance companies,
and other large institutions. It is difficult to prevent evasion
of the stamp taxes by individuals engaging in isolated transfers.
The present system avoids some of the economically unfa-
vorable aspects of stamp taxes in other countries. It dces not
tax bank checks, but does tax each deposit to a bank account
at Cr$ 3 for each deposit, a tax so low that it hardly seems
worth keeping. It does not tax transfers of real estate, though
it does tax agreements to transfer, at rates of from 1 to 3
per cent . Many municipal governments, however, impose heavy
taxes on real estate transfers, sometimes as high as 12 per cento
Such taxes prevent properties from beinrr put to their best use,
or induce artificial mcthods of transfering controI while not
transfering title .
In general, the stamp taxes are not a promising source of
new revenue. In most modern tax systems they have been
playing a steadly declining role .

c- "S,ingle Tax"

(Impôsto Único) on Motor Fuels, etc.

The so-called «single-tax» on liquid and gaseous fuels, lu-

bricants, and domestic mineral produts is in fact a collection
cf taxes at various rates on these items, but is «single» in
the sense that no other taxes, not even state and municipal
taxes, are imposed ou them. It appears, however, that some
states are trying to enter this field. The Supreme Court has
granted the State of Minas G€rais the right to levy taxes on
oil that is exported. The State of Rio de Janeiro is collecting
taxes on gas stations. 2

2 See N cte lI-e -I, in Appendix.

70
 The most important of these taxes is that on gasoline. The
rate is 200 per cent on imported premium gasoline and 100 per
cent on domestically produced premium gasoline. On úther
types of gasoline the rates are 150 per cent (imported) and
75 per cent (domestic). Almost 90 per cent of the gasoline
consumed in Brazil is domestically refined.
The revenue goes 40 per cent to the Federal Govemment,
48 per cent to the State Governments, and 12 per cent to the
Municipalities . AlI this revenue is earmarked, almost all of it
for highways; a small proportion goes to railroads.
The total revenue is running at about Cr$ 220 billion a
year - not very different from the stamp tax yield .
The rates of tax on gasoline are on the price at the
refinery. They are therefore much lower as a percentage of
retail price. If they represent about half the price paid by the
motorist (half the price including tax) they are at leveIs some-
what higher than in the United States, but decidely lower
than in many European countries . Evidently there is roam
here for higher tax rates, if the present tax revenue falls
short of highway expenditures, ar if increased highway expen-
ditures are contemplated .

71
 PART In

THE NATIONAL TAX SYSTEM OF BRAZIL

 THE NATIONAL TAX SYSTEM OF BRAZIL t

A - The Network of Federal, State and Local Fiscal

Relations

The mational» tax system of Brazil means the aggregate

system of federal, state and municipal taxes. The federal taxes,
discussed in Parts I and II above, account for some 55 per cent
of the total, the twenty states for about 35 per cent, and the
municipalities for about 10 per cento
Brazil became a federal entity by disaggregation rather
than by combination, as in the United States of America .
Unspecified powers are reserved to the federal government,
not the states. The taxing powers of the states, originally
ni! when they were mere provinces, have grown through
adoption of new constitutions and constitutional amendments
that have specified precisely what taxes the states may use,
and also the taxes available to the munipalities. The taxel:!
that the federal government may employ are likewise named
one by one. Any tax not in these lists may be imposed by
either the states or the federal government but not by a
municipality . The federal government, however, has priority
(Article 21 of the Constitution), but at the cost of (1) allowing
the states to collect the tax, (2) yielding 40 per cent of the

1 See Note III-A-l , in Appendix.

75
revenue to municipalities where the tax is collected and another
40 per cent to the colJecting state. This mixture of advantage~
and disadvantages to a11 concerned has in part kept a11 states
and the federal government from imposing any unspecified taxo
Complete separation of sources is thus tbe rule. This
device for regulating fiscal conflict in a federal state commands
little support in public finance theory, because of its ngidity
alld inability to adapt to needs and capabilities cf the several
leveIs of government.
Even if separation of sources be accepted as a principIe,
the present system in Brazil appears ripe for change . The
power to tax exports from Brazil, now reserved to the states,
wouId seem more appropriately placed with tbe federal gov-
ernment, since it lies in the field of international trade policy.
The states are, indeed, restricted to a 5 per cent rate maximum
(10 per cent can be authorized by the Federal Senate in excep-
tional cases in a fixed period), and only the state of production,
not the state of transit, can levy the tax. Some port «Íees»
and other «charges» are said, however, to be so heavy as to
violate this latter restriction . In general, an export tax seems
naturally to be a federal taxo
The power to tax unimproved rural l~nd , that is, chiefly
farm land and cattle ranches, now, since 1962, lodged with the
municipalities (and fo rmerly with the states) could be a useful
instrument fcr agrarian land reform if it were transfered to
the federal government. The state tax on transfers and death
will be kept at low leveIs because of interstate competition for
wealthy decedents as long as it rema5.ns reserved to the states.
The federal government's exclusive right to levy consumeI'
taxes deprives states and large municipalities of fiscal instru-
ments that may be suitable for them, for example, taxes on
cigarettes or certain luxuries sold at retail . Similarly, one
may question the advisability of preventing the states and
municipalities from taxing motor fue!.
The other extreme from complete separation of sources,
namely, complete freedom of action for a11 government units,
is equa1Jy unaccep table ; it would be an invitation to chaos.
What appears to be called for is some intermediate system,

76
allowing a certain degree of overlapping of tax jurisdiction,
especially in the wealthier states and municipalities, but regu-
lated by ceilings on rates, or credits of one tax against another,
or deductibility of one tax in computing the base for another.
But even such a system would leave the poorest states and
municipalities unable to support themselves. Grants-in-aid,
distributed by formulae based on (1) needs, (2) revenue
raising capacity, and (3) effort actually exerted to utilize
that capacity, would presumably be required. Any such
transfer of funds from one leveI of government to another is
likely to provoke polítical and social disputes and recrimination
and should therefore be kept to the minimum to accomplish
the task of aiding the poorer areas. There would be no point,
under this system, to distributing grants-in-aid t o the wealthier
states and municipalities, especially as they would have more
freedon than at present to impose their own taxes. From this
point of view, the existing assignment of flat percentages of
revenue from the federal consumption taxes (15 per cent) and
income taxes (10 per cent) is wasteful. By Article 15 of the
Constitution, the income tax share is distributed in equal
absolute amounts among the some 3.000 municipalities, rich
or poor, large or small. To be sure, capital cities are excluded;
at least half the revenue must be expended (by each munic-
ipality?) to benefit rural areas; and the equal absolute division
guarantees a larger per capita amount to small cities than
to large ones (but small cities are not always low-income
cities). Still, part of the share goes to municipalities that are
wealthy, per capita.
Under any system of shared taxes and grants-in-aid de-
signed for more than merely administrative convenience, the
wealthier states and municipalities must resign themselves to
the role of net contributors, foregoing that of net recipients;
if the poor are to be aided, the rich must give.
Recognition of these redistribution needs is not lacking
in the Brazilian Constitution, but it appears in bits and pieces.
attached to this or that tax revenue . The rural-area provision
for income-tax sharing is duplicated in the sales-tax sharing.
The «single tax » on motor fuel, etc ., is distributed, 60 per cent

77
 at a minimum, to states, the Federal District and the munici-
palities «in proportion to their area, papulation, consumption
and production» (Art. 15). States are required to aid rounic-
ipalities (other than capital cities) by giving them 30 per cent
of the excess of state taxes (except export taxes) collected in
a municipality over the municipality's revenues from all sources
(Art . 20). The federal governroent must spend not less than
3 per cent of its tax revenue each year on works and services
of economic assistance in its plan of defense against the effects
of drought in the N ortheast, and the states in tbe drougbt area
are subjected to a similar requirement (Art. 198). Ancther
3 per cent minimum of its tax revenues must be invested by
the Federal Government in the execution of the pIa0 to enbance
the economic worth of the Amazon region, and the states
and municipalities in that region are subject to tbe saroe
requirement (Art. 199). Although the Federal Government
must levy its taxes uniformly tbroughout tbe nation (Art. 17),
this provision appears to have been circumvented for the benefit
of the poorer, or rural areas, by development laws granting
income tax relief to firms located in the Northeast, for example.
The questian arises whetber this constitutional provision shauld
not be repealed, so that tbe Federal Government could directly
vary its income tax from one region of the country to another.
The reroarks, up to this point, presuppose a stable price
leveI. When prices rise by 30 per cent or more a year, states
and municipalities rapidly lose tbeir fiscal powers and becoroe
subservient to the government that bas the power to print
money, unless they possess the kinds of tax that ride witb
inflation in place of being submerged by it. Fortunately for
tbe states, in Brazil, tbe crude type of cascade sales tax they
employ, and even the more refined single-stage tax of Ama-
zonas, are of just this kind.
Tbese sales taxes are currently supplying about 70 per
cent of state revenues at rates of about 4 ar 5 per cent (12
per cent for the Amazonas single-stage tax) . The municipalities
have been less fortuna te. Tbeir business and industry tax, to
be sure, is in fact largely a tax on gross receipts, but the tax
on real estate can cope witb inflation only by a continuaI revi-
sion of assessed values (income or capital values) that is

78
 a

clifficult to maintain. It is said that some of the poorer munic-

ipalities, for example in Mato Grosso, can scarcely maintain
themselves at present. The theory of public finance contains
no formula e for a stable system of federal-state-Iocal fiscal
relations in a world of unstable prices. A revamping of the
present system must therefore assume, first, a return to price
stability.

B - Remarks on ParticuLar Taxes

If the states are to retain the sales tax, consideration could

be given to transforming the turnover, cascade-type taxes
into the value-added type employed by the federal consumption
taxes, ar possib\y into a single-stage taxo The single-stage tax,
however, might favor the producing states over the consuming
Gtates. But so too would a value-added tax, unless it could
be extended to the retail leveI, which seems impracticable ai
p~esen t, administratively. A higher tax rate would be required
but if evasion were reduced, it might not need to be much
higher.
The treatment of interstate commerce will always be
troublesome under such sales taxes . In principIe, a state taxes
. transactions, occuring within its territory, including exports,
but does not tax imports as such. Economic competition among
states tends to keep the tax rates at about the same leveI,
except as transport costs, or at the extreme, non-transportabil-
ity, can protect some industries from competition from lower-
taxed industries in other states. Freedom of fiscal action
is thus limited. But this limitation seems preferable to a
system that would exempt exports to other states and tax
imports, for the interstate customs barriers would be intolerable
in a federal state . Interestingly enough just this system can in
fact be used in a federal area if the state sal€S tax is confined
to the retail leveI, supplemented by a tax levied direct1y on
consumers who import from other states. This is what the
states of the United States do. But a retail sales tax requires
a system of retail trade based largely on big department
stores and chain stores that are relatively easy to controI,
fiscally.

79
 The urban property taxes of municipalities can presumably
be strengthened by improved assessing and collection proce-
dures, perhaps to the point where the tax on industry and
commerce could be reduced if not repealed, thus leaving only
two leveIs of sales taxation.
The tax on transfer of real estate, former1y a state tax,
now, since 1962, reserved to the municipalities, is said by some
authorities to be more suitable for state or federal use. It
is in fact administered for the municipalities by the states,
except in Rio and São Paulo. The high rates of tms tax (12
per cent in some cases) are dangerous economically, as they
impede transfer of land to its most efficient uses, or else, as
is said to be the case in Brazil, lead to artificial methods of
dransfeo - for example an agreement to seU that is never
c·onsummated.

80
APPENDIX: NOTES
 APPENDIX: NOTES

1. Data on revooues and expenditures are irom "The G. O . B. Budget,

1955_1964", Ec ~ nom ic s Staff, Office Cif Program Planaling,
USAID/Brazil, June 19, 1964; on Gross Domestic Product, from
"Produto Interno Bruto .. . 1949/ 1963", Instituto Brasileiro de Econo-
mj·a, Fundação Getúlio Vargas, Guanabara (no date). Virtually the
same percentages are obtained from the data, presented in somewha.t
less detlil, in Proposta Orçamentária para o Exercicio de 1965,
p. IV.

2. Proposta Orçamentária para o Exercido de 1965, pp. 12 : ( tax

reV&lUe on current account, Cr$ 2,777,391,726 thousand); 13 : (fees ,
Cr$ 11,088,284 thousand) ar..d 16: (capital receipts credit operations :
additional lQl\ incO'lne tax, Cr$ 121,560,000 thousand, "para Rea-
parelhamento E o:mômico", and additional OIII profi ts of juridkal
persons, "Lei n O 2 .862, de 4 de setembro de 1956", Cr$ 28,310,000
thousand: total, Cr$ 149,870,000 thousand for credit operations :
other capital receipts are only Cr$ 130,301 thousand). On p. V
of the budget the entries are "Receita Tributária", Cr$ 2,788,480,011.
thousand and "Receita.s de Capital", Cr$ 150,000,301 thousand .

3. Current anonthly rate of coUection in August, 1964, was estimated

at Cr$ 18 billion (Mini'Stry of Finance officials) .

4. Proposta p. 11

5. Proposta p. 12
6 A breakdown is avallable only for the Cr$ 605 billlon oomponent :
collection at source, Cr$ 299 billion ; juridical persons, Cr$ 202
billion; individuais and the "a.ddi ti cm ai" , Cr$ 103 billion. Ministry
of Finance .

83
 7. Proposta.. p. 10

8. Prop: sta p . 11,9, 11 3.:1d 13

respectively .

9. Proposta Orça m en tária p 3ra o E xerc icio de 1965, pp. VII and X.

:lO. Propos ta Orçam en tá ri a par a o Exercício de 1965, pp. 14 (receipts)

and 248 (expenditures ) .
:11 . Pr·o-posla. . . .. ... .. . ...... . . . . . . . . . . . . . . . . .. p. 245
Sum of the tw o X .36 items.

12 . PropJs ta..... ..... . . . . . . . . . . . . . . . . . . . . . . . . p. 24f.

Sum of items X . 20 a nd X . 05 .

I - A-I. The cha71ges in th e fis cal mInlmUJTI wage and in the con-
sumers price index have ccn-es ponded fait'ly closely in recent
years, a s the foJl awing table shows . At present Brazil is
d ivided into 30 r egions fOI' comput ing a minimum wage,
but there a r e only s eme ten different minimum wa g es . The
lowest is Cr$ 20,000.00 a m :mth . The min1m uin wage in
São Paulo, Guanabara , and Belo Horizonte is Cr$ 42,000.00.
Most of the minimum wages are in the range Cr$ 30-,000.00
to Cr$ 40,000.00.

Percentage Changes in Legal Minimum Wage in State cf Guanabara

and the Cost-of-Living Index. 1

Date M 4wimwn Wage Y early Perce-lI~age Change in

Mi~tilllltmn Wag e Cost-of -L-it;ing lndex

.ran . 1952 1.200

.ruI. 1954 2 . 400 100.0 % 54,4 %

Ago. 1956 3 . 800 58,3 % 51,4 '70

.ra..n . 1959 6.000 57,9 % 47,8 '70

Dut . 1960 9 . 600 60,0 % 70,0%

Dut . 1961 13 . 440 40,0 % 38 ,4 '7c
.Tan. 1963 21 . 000 56,3 % 67,1 %

(Jan.1964)
Fev. 1964 42 . 000 100,0 % 93,4 %

Source ; Anuário Estatistico d :J Brasil - 1963 e Diário Oficial.

 I - A - 2. Information supplied by Ministry of F'inance.

I - F - 2. Dr. Alan Murray, of the staff of the Joint Economi-c

Committee, Congress, 'W ashington, D . C., has written a
del-ailed description and critique of the British withholding
system, including a comparison with the United States
system (Pb . D . dissertation at Columbia University).
I - I-I. Let a concern obtain 100 profit every year, before deductíng
income tax paid that J'ear, including its first year, when
there is iIlO income tax paid. The tax pa.yable in years
1, 2, 3, 4, 5, and 6 are as foUaws:

Year 1 2 3 4 5 6

Inccme 100 100 100 100 100 100

T ax paid O 23 17 . 71 18.86 18.63 18 .(3

Income after tax 100 77 82 .29 8l.14 8l. 37 81 . 37

Nominal. tax rate .23 . 23 .23 .23 .23 .23

Ta..'C payable next year 23 17 . 71 18.86 18. 63 18 . 63 18 , 63

II - A-I. Proposta Orçamentál'Ía p ara o Exercício de 1965, p. 9-10.

II - C-I . Informatian f rom Ministry of Finance.

III - A-I . Much Df the information in this Part III was gained frJm
the round table addresses by Dr. Rubens Gomes de S :lUza
and diSCllssiQn by the other particip::mts (see Introdt.:.ction
above) and from Dr . GJ mes' article, "O Sistema Tribu -
t ário Federal", in R evi.st,a de Direito Administrativo, VJ I. 72 ,
April-.June, 1963, pp . 1-22 .

85
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DA GRÁFICA EDITORA LIVRO S I A
R. TAPIRAPt, 74 - TEI..: 49-4758-RIO