Tax Reform, Income Distribution and Poverty in Brazil: An Applied General Equilibrium Analysis

Abstract

This paper analyses the impacts of three different indirect tax policies on the Brazilian economy: reduction of indirect taxes over the main household consumption products: reduction of indirect taxes over the main inputs used in agriculture; and the reduction of indirect taxes over all products in a specific region (Sao Paulo State) in Brazil. The analysis was carried out with the aid of an inter-regional static general equilibrium model of the country that was linked to a micro-simulation model used for poverty and income distribution analysis. The first two simulations showed that the policies have potential to improve income distribution, mainly benefiting the lower income families in the poorest regions. The reduction of indirect taxes over goods and services in Sao Paulo state shows that this state would benefit more compared to the other states, an example of the so called fiscal war. This policy also points to some regressive effects of the tax policies on income distribution, since it disproportionately benefits the higher income groups located in the Sao Paulo state. The strong fall significant drop in tax collection should be taken as a sign for restraining policy implementation.