Faria Lima spent the day in agony with a Folha article reporting that the Government is preparing to increase taxation on the income of individuals earning over R$1 million per year.
It would be the ‘millionaires’ minimum tax,’ a tax instrument to increase the effective burden on the wealthiest Brazilians, who earn the majority of their income from dividends, stock profits, or financial investments.
A government source told Brazil Journal, however, that the measure would be revenue neutral, aiming only to offset the R$35 billion needed to raise the income tax exemption threshold to R$5,000 – a campaign promise of President Lula.
“But this is one of four ideas under consideration, and it is not a priority at the moment, as the Finance Ministry’s efforts are focused on structuring policies to ensure compliance with fiscal targets,” said the source.
Currently, individuals earning up to two minimum wages – that is, R$2,824 – do not pay income tax.
Market estimates place the cost of increasing the exemption threshold between R$70 billion and R$110 billion per year.
But according to the Government’s calculations, these numbers are exaggerated: the new exemption threshold would cost R$35 billion/year.
Another source following the discussions mentioned that raising the exemption threshold to R$5,000 is not something that should be done now; the plan is to pave the way for the promise to be fulfilled by the end of the Government in 2026.
Increasing taxation for higher earners is part of the Income Tax reform project, with one of the pillars being to reduce the regressivity of the system – reversing the current situation where the highest earners proportionally pay less income tax.
According to the Revenue estimates, there are about 250,000 individuals with annual earnings exceeding R$1 million.
If the potential minimum tax proposal goes forward, an additional tax of up to 15% could be imposed – thereby reducing the existing disparities in comparison to taxpayers under the CLT system.
While a formal sector worker pays an income tax rate of up to 27.5%, those under the Simplified Tax Regime have an average effective tax rate of 6%, and those under the Presumed Profit System pay around 11%.
For those under the Actual Profit regime, the maximum tax rate rarely reaches 35%. (In the US, it is 37%, and in Europe, it often exceeds 40%.)
This is because the maximum corporate tax rate in Brazil is 34%, but the effective rate is 20% due to legal deductions.
Another speculation that soured the mood in Faria Lima and Leblon was that the Government could adopt some form of ‘exit tax’ to tax capital leaving the country and deter capital flight.
However, a Government source told Brazil Journal that there is nothing under consideration in that regard.
In recent months, the Treasury and Planning have been working together to design structural measures that can reduce expenses over time – especially some linked to the minimum wage – and slow down the growth in spending.
The menu of alternatives has already been presented to President Lula, who still needs to make a decision.
While the President decides, expectations worsen and long-term interest rates continue to rise – essentially nullifying the impact of Moody’s placing the country one step away from investment grade.
In the Treasury Direct, the interest rate on the NTN-B 2029 rose to 6.7% – the highest in almost a year.
In a skeptical local market about Lula’s conviction and that of much of the Government about the need to deliver a fiscal surplus, a report was also priced in today suggesting that Eurasia commented on the threats of new creative accounting measures to circumvent budget constraints.
According to Eurasia, it is unlikely that Lula will support significant spending cuts.
The consultancy predicts that in 2025 and 2026, the spending limits will become more restrictive, at a time when Lula and his allies will be preparing for a possible re-election campaign. It is a struggle destined to be fought by Fernando Haddad and his team in the effort to maintain spending restrictions.
“Creative accounting will be the most significant risk,” said Eurasia, in a scenario where the framework may be “formally modified or lose substance with various changes.”
The burden of reversing expectations remains with the Presidency.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
