The Effects of Federal Tax Spending on Brazilian Fiscal Federalism

Abstract

The federal government presented a waiver of R $ 400 billion in tax revenues in 2015, with R $ 270 billion referring to tax expenditures and an additional R $ 135 billion to revenues shared with States and Municipalities. Tax expenditures, directed at the private sector, are concentrated in the most developed regions of the country, while direct transfers of tax resources from the Union to States and Municipalities favor less developed regions. As tax expenditures correspond to approximately twice as much as tax transfers, the resources that the Union renounces end up mostly in the more developed regions. Only the State of São Paulo received, directly or indirectly, R $ 92 billion of the total federal waivers in 2015, exactly the same amount passed on to the entire Northeast region. As a result of this process, the Union's allocation of resources does not act to reduce regional disparities. This Monograph defends the inclusion of federal tax expenditures in discussions about Brazilian federalism. The proposal is to reduce the differences between indirect transfers of revenues from the Union to the private sector with direct transfers of resources to the public sector. To this end, it is proposed to eliminate tax expenditures in the total amount of 0.87% of GDP. The end of these waivers will also have an effect on state and municipal revenues. The impacts of such a change were assessed using a neoclassical general equilibrium model. There were four simulated scenarios for using the additional revenues: (1) all governments increase their spending; (2) the federal government and municipalities increase their spending, but States reduce ICMS; (3) States and Municipalities increase their spending, but the Union reduces the social security contribution; and (4) Only the Municipalities increase their spending, States reduce the ICMS and the Union decreases the social security contribution. The results were very sensitive to the policies adopted by the federal government.