Taxation, Redistribution and the Social Contract in Brazil

Abstract

The paper explores theoretically and empirically Brazil’s tax revenue from a political and political economy perspective. The absence of ‘big bang’ reforms to the tax code and tax administration suggests that policy models are less directly relevant to explaining the rise in the tax/GDP ratio. The paper makes the argument that public consent to the hike in taxes is explained by a combination of democratisation, strong preferences for redistribution, fiscally responsible centre-left coalitions, and bureaucratic capacity. New political incentives under democracy combined with high state capacity and a powerful presidency with the political resource necessary to pass an agenda of social reforms to sustain this new equilibrium of high taxation and high redistribution. The current level of taxation and spending in the country in a context in which poverty and inequality is high (although declining rapidly) has prompted concerns about the fiscal sustainability of this equilibrium. The paper argues against pessimistic accounts of this dilemma - such as the arguments based on the concepts of fiscal illusion and inequality traps - and advances an optimistic perspective based on the notion that a new fiscal contract seems to be emerging.