Fiscal Systems and Place Inequality: Brazil (appendix)

Fiscal Systems and Place Inequality: Brazil (appendix) JOSÉ ROBERTO R. AFONSO Workshop Exchanging Data and Skills in Place Inequality: UK and Brazil Edinburgh, 7-8/9/2010 University of Edinburgh & Centro Estudos Metrópoles

2 APPENDIX

So far we have seen the political and administrative functioning of the country, especially after the 1988 Federal Constitution. Brazil is a federal republic and have used the mechanism of decentralization to distribute the funds raised. The funds come from tax revenues. This is the major mechanism by which the government used to raise the population the necessary revenue to fund their spending. So, the next step of the presentation is to understand how the public interacts with the population in terms of revenue and expense. It will be seen, first, the evolution of Brazilian tax burden and then government spending.

Tax & Transfers

Provision of Goods and Services versus Financing Goods and Services: Public goods / meritorious Divisible services (features private) Basic form of financing: Taxes: public goods / meritorious Fees, charges for use: services divisible Intergovernmental transfers: EQ vertical / horizontal, compensation, implementation of public policies

Sources of Funding Revenue budget: Tax Revenue - taxes and fees Revenue Contributions - social and economic Recipe Sheet - securities, concessions and permits, rents, other Revenue Agriculture, Industry and Services Intergovernmental Transfers - current and capital Receipts of Loans - Debt and inter-generational redistribution of the burden of public action

Assignment of Taxing Powers A Representative Assignment of Taxing Pow ers Types of Tax Determination of base Determination of rate Collection and adm inistration Property S L L Land S L L Frontage and betterm ent S,L L L User charges F,S,L F,S,L F,S,L Poll F,S,L F,S,L F,S,L Personal income F F,S,L F Single-stage sales S S,L S,L Excises S,L S,L S,L "Sin" taxes Betting and gambling taxes S,L S,L S,L Lotteries S,L S,L S,L Racetrack taxes S,L S,L S,L Taxation of "bads" Energy taxes F,S,L F,S,L F,S,L Motor fuels tolls F,S,L F,S,L F,S,L Effluent charges F,S,L F,S,L F,S,L Congestion tolls F,S,L F,S,L F,S,L Parking fees L L L Resource taxes Royalties, fees... S,L S,L S,L Conservation charges S,L S,L S,L Source: Shah 1994. Note: F = federal, S = state or province, L = municipal or local government.

36% 34% 32% 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% Tax Burden in Postwar % of GDP ( 2009 = 35% GDP) Em % do PIB 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 CARGA TRIBUTARIA BRUTA GLOBAL NO PÓS-GUERRA: 1947 a 2009e Anos

Legend: Composition of Taxes Goods and services: IPI and ICMS (Value Added); COFINS, PIS-PASEP Contrib.Econômicas (including CIDE), ISS (Cumulative); Contribution to PIN, Seal Special Control, duty free shops and Royalties Salary: Contribution of Social Security (INSS), S System and Wage-Education; FGTS; Contribution Servers (3 balls). Income = IR, CSSL, IR Withholding by states and municipalities, and Federal contributions Lottery contributions Improvement. ITR = property; IPVA and ITCD; property tax and property transfer tax. Trade = taxes on exports and imports. Fees = 3 levels of government (municipal contribution includes public lighting) Financial Transactions = IOF and CPMF. Taxes other = other taxes, including income from the outstanding debt, penalties and interest.

Tax Jurisdiction: Main tribute Member of the Federation FEDERAL GOVERNMENT STATES AND FEDERAL DISTRICT MUNICIPALITIES AND FEDERAL DISTRICT MAJOR TAX -% of total tax revenue in 2008 foreign trade - imports (II) and exports (IE) of goods and services 1.66 income and earnings of any nature (IR) 18.84 industrialized products (IPI) 3.74 financial operations (IOF) 1.95 rural property (ITR) 0.04 inheritance and donation of any property and rights (ITCD) 0.14 operations on the movement of goods and the provision of interstate and intermunicipal transportation and communication 21.28 (ICMS) vehicle ownership (IPVA) 1.67 estate and urban land property tax (IPTU) 1.21 inter vivos transmission (ITBI) 0.38 on services (ISS), except the base of the ICMS 2.12 Charges - garbage collection, license for operation, etc. 0.32

Major social contributions Member of the Federation MAJOR SOCIAL CONTRIBUTIONS -% of total tax revenue in 2008 Contribution to Social Security Financing (COFINS) 11.32 Social Integration Program / Program of Development of the Heritage of Civil Servants (PIS / PASEP) 2.96 GOVERNMENT FEDERAL Social Contribution on Net Income (CSSL) 3,25 Provisional Contribution on Financial Transactions (CPMF), extinct in 2008 Contribution to the General Administration of Social Security (INSS) 4.07 15.79 Percentage of total revenue: Calculation based on information the SRF / Ministry of Finance

Main Taxes in 2009

Intergovernmental transfers Of Sharing System of Tax Regional Funds Municipalities 3% IR and IPI (FCO. FNE and FNO) Central Gov. FPM 23,5 % IR and IPI IRRF Public Servers 70% IOF-Ouro 50% ITR States FPE 21,5 % IR e IPI IRRF Public Servers 30% IOF-OURO FPEX 10% IPI 25% ICMS 50% IPVA 25% FPEX

Responsibilities and Expenditure

Allocation Expenditure 15 Constitution of the Republic discriminate by field of government powers, either to legislate or to implement actions or services. In theory, the division of responsibilities and tasks in compliance with the standards recommended by the good techniques of finance and federalism, and adheres to the rule of the majority of international experiences. In practice, the reality is different: complexity of relationships, justaposition of work and disruption in the actions are hallmarks. In many areas of government performance, there is a complex web of intergovernmental relations. Also differentiated in presence of the same government so that they ensure the priority tasks in certain regions or microregions, which is not repeated elsewhere; This can explain the profound regional differences, economic, social and cultural as well as the broad autonomy of the federated entities.

Distribution of responsibilities and resources There are specific areas where more than one sphere of government has responsibility, while others are not clearly defined for any field; Local governments have gained more autonomy in the provision of services, particularly in health and education services; Municipalities are spending more than the central government transport; Local governments are also more important in investimento fixed costs: 45% da gross fixed capital formation of public sector; The decentralization of tax revenues that decentralization leads in orders.

Spending Issues The constitutional chapter dealing with governmental powers is much more vague, without establishing a clear division of tasks between these areas. There is an overlap in some areas and lack in others. The central government only managed to satisfactorily perform its function of coordination and sub-national governments adopt policies overly self in primary school and public health. Sub-national governments dominate the expenditure of public officials in business, costing and other, especially in fixed investment. The central government only prevails in the case of transfers to persons (mainly payments forecast) and in the interest payments on public debt.

Federative division of public expenditure Total expenditure Governamental Demand Total de Gasto inclui Juros 12% = 4,7% do PIB 26,6% = 4,9% do PIB 25% = 9,8% do PIB 63% = 24,7% do PIB 35,1% = 6,5% do PIB 38,2% = 7,1% do PIB Federal Estadual Municipal Federal Estadual Municipal 18

Different composition federative of expenditure Intermediate consumption 25,4% = 1,7% do PIB Social benefits 41,3% = 2,8% do PIB Federal Estadual Municipal Fixed capital formation 45,3% = 0,8% do PIB 33,3% = 2,3% do PIB 15,5% = 0,3% do PIB 82% = 13,0% do PIB Federal Estadual Municipal 15% = 2,4% do PIB 3% = 0,5% do PIB 39,2% = 0,7% do PIB Federal Estadual Municipal

Federative Division Expenditure by Function (2005) Despesa Total - Execução Direta: em 43.3% do PIB 6,5% do PIB = 15% Gasto Social - Conceito Amplo 22,1% do PIB 11,3% do PIB = 26% 25,5% do PIB = 59% Municípios; 4,6%; 21% União União Estados Municípios Estados ; 5,5%; 25% União; 12,0%; 54% Estados Municípios 20

Local Government

Brazilian Municipalities Share of GDP Among the possible ways to measure and evaluate the Gross Domestic Product of Brazil one to analyze the contribution of each Brazilian municipality in the formulation.

Growing Importance of Municipalities Became increasingly important in Brazilian Federation increased revenue mobilization capacity and more active role in service delivery, particularly in the social area After the 1988 Constitution, municipalities enjoy greater autonomy as regards to levying their taxes, making expenditures, and even hiring employees, defining their salaries, and contracting debts Total municipal revenue : US$ 45 billion (7.44% of GDP) One third from own revenue and two thirds from transfers received from federal and state governments Total municipal expenditure: US$ 44 billion (7.26% of GDP Overall surplus: US$ 1 billion (0.19% of GDP and 2.5% of revenue)

Federative Issue Total Tax Revenue Share: Growing importance of Municipalities Source: Afonso & Meirelles (2006). Original source: IBGE, SRF, STN

Distribution of Municipal Revenue - 2004 8% 7% Own Tax Collect 24% Own (others) Shared Tax 26% 24% 11% Tax Transfers (mandatories) Health System (regular grants) Other Transfers Source: Afonso and Araújo (2006). Original source: Brazilian Institute for Geography and Statistics (GDP) and National Treasury (balance sheets consolidated for 4,579 municipalities). Values in local currency converted to dollar according to mid-year exchange rate ( R$/US$ 2.93 ).

Municipal Tax Burden 2005 Source: Afonso and Araujo (2006). Original source: Afonso and Meirelles (2006), based on preliminary projection tax burden to 2005. Other taxes: taxes and interest and penalties collected for late payment or nonpayment of taxes but not identifiable by tax category. Values in local currency converted to dollar according to mid-year exchange rate ( R$/US$ 2.43 ).

Local Revenues from Other Governments The Brazilian constitution also establishes rules for the distribution of revenues in a decentralizing nature and creates intergovernmental transfers to correct regional inequalities It defines a system of unconditional transfers between governments and also details the constitutional revenue sharing, even specifying the applicable percentages, limits on the use of such resources, and in some cases detailed criteria for their distribution Besides, there are also discretionary transfers based on ad hoc decisions

Distribution of Revenue and Transfers to Municipalities 12% 3% Shared Taxes 37% Mandatory Transfers 48% Transfers from Health System (federal) Discretionary federal transfers Source: Afonso and Araujo (2006). Primary source: Afonso and Meirelles (2006), National Treasury; and Health Ministery. State transfers: preliminary projection on tax sharing revenues; not available for discretionary transfers. Values in local currency converted to dollar according to mid-year exchange rate ( R$/US$ 2.43 ).

Local Government Borrowing Local governments are allowed to borrow from domestic and foreing banks and to issue bonds in domestic and foreign markets Local autonomy is full, however, the relative importance of borrowing for local finance is very small today (1% of revenue) Exceptions are big cities such as São Paulo and Rio de Janeiro

Institutional difficulties versus Urban Development The structure of financing of urban infrastructure is rigid and improper Lack combined efforts and financial institutional integration of the three levels of government Institutional difficulties remain to expand public-private relationship Difficulty maintaining sustained flow of public investment + lack of institutional support for financing the investment> affect urban development and involve higher costs for the population Source: SOL GARSON

Inequalities

In other words, intra-regional disparities have grown causing disparities become multifaceted. For better understanding, then it will be shown a map of Brazil with the distribution of GDP per capita.

Population Representation in% - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 7.1 27.7 42.6 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 8.0 14.6

GDP Representation in% - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 13.8 7.5 5.0 55.2 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 18.6

Conditions of Life Index - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 0.737 0.791 0.676 0.808 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 0.725

Distributions of Seats - Chamber of Deputies - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 8.0 34.9 29.4 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 12.7 15.0

Distributions of Seats - Congress - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 8.9 30.0 32.2 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 14.5 14.5

Distributions of Seats - Senate - Brazil 2005 More Developed Regions = South and Southeast Less Developed Regions = Northeast, North and Midwest 14.8 14.8 11.1 Southeast Region Southern Region Northern Region Northeast Region Midwest Region 33.3 25.9

Share of GDP - Inequalities The other way to analyze this contribution of municipalities on GPD is to investigate the concentration / inequality of GDP by the Brazilian territory.

Inequality of GDP and GDP per capita Values shown indicate that the concentration of GDP has been increasing over the years, though, in terms of GDP per capita there is a reduction of inequality.

Inequality in Brazilian Municipalities Analyzing the data by regional distribution can be extracted that the inequality of GDP among Brazilian regions have been converging and rising.

Inequality in Brazilian Municipalities As to the inequality of GDP per capita are observed divergent trends from region to region. With the exception of the Northeast, all other regions showed increases in levels of inequality of GDP per capita.

Welfare Social Security

To clarify the case of revenue sharing and the mechanism of decentralization will be presented the case of Social Security.

Questions Peculiar arrangement for funding and spending on pensions, health and assistance Advantages: increased social spending and high, active central government, reducing poverty and inequality... Disadvantages: excessive tax burden, poor quality and inequitable; derangements federation... Interesting, needs more study and improvements: not a model

History: ideal principle Constitutional reform of 1988: Innovations in concept and social security rules Expenditure - expanded access... flexible retirement (minimum wage floor, including rural...) and new welfare benefits (poor elderly and poor) universalized public health Revenue - Diversifying sources Contributions on wages and business income (relocated), earnings and financial transaction (new): in practice, general taxes and not just individual contributions

Finance and Central Government expenditure on Social Security - 2005 Income and Social Security costs - do as% GDP 2005 Revenue Collected + DRU 14,67 Total Income Security 12,95 Expenditures Made 13,67 Total expenditure Adjusted Security 13,68 Security Results -0,76 Revenue decoupling of the Union (DRU) 1,72 Results Adjusted Security + DRU 0,99 Source: TCU

Security Financing Today Expenditure: Pension reform: limited impact and increased spending in real minimum wages increased Welfare benefits: expansion of federal income transfer; Health: linking spending remains stable Funding: Tax burden: rapid expansion because of the contributions Problems: size, to competitive, regressive

Assessment of Expenditure General system of pensions and benefits: continued expansion and increasing deficit spending since 1997, linked to the contributions of wages; spending by 2.5% in 1988 to 7.6% of GDP in 2005, the current deficit at 2.5% of GDP establishment and expansion of welfare benefits to income independence Health and pensions of public officials: without specific coverage; rehousing scheme raised to fund pension contributions; health related to the temporary contribution on financial transactions and then GDP and tax permanent subnations.

Health: (some) privatized and (increasingly) decentralized Despesas com Ações e Serviços Públicos de Saúde, como proporção do PIB Brasil Período: 2002-2008 Ano Despesa (em R$ mil correntes) Federal Estadual Municipal Total % PIB Despesa (em R$ mil correntes) % PIB Despesa (em R$ mil correntes) % PIB Despesa (em R$ mil correntes) % PIB Fonte: Instituto Brasileiro de Geografia e Estatística IBGE. Conta-Satélite Saúde Brasil: 2005 a 2007. Rio de Janeiro, 2009. Disponível em: http://www.ibge.gov.br/home/estatistica/economia/economia_saude/css_2005_2007/economia_saude.pdf. Departamento de Economia da Saúde e Desenvolvimento/SE/MS 14 2002 24.736.843 1,67% 10.278.420 0,70% 12.029.372 0,81% 47.044.635 3,18% 2003 27.181.155 1,60% 12.144.792 0,71% 13.765.417 0,81% 53.091.364 3,12% 2004 32.703.495 1,68% 16.028.249 0,83% 16.408.719 0,85% 65.140.463 3,36% 20. 2005 37.145.779 1,73% 17.236.138 0,80% 281.227 0,94% 74.663.144 3,48% 2006 40.750.155 1,72% 19.798.770 0,84% 23.555.008 0,99% 84.103.933 3,55% 2007 44.303.497 1,66% 22.566.270 0,85% 26.368.683 0,99% 93.238.450 3,50% 2008 48.670.190 1,62% 27.926.885 0,93% 32.267.633 1,07% 108.864.708 3,62% Fonte: Ministério da Saúde/Secretaria Executiva/Departamento de Economia da Saúde e Desenvolvimento/ Sistema de Informações sobre Orçamentos Públicos em Saúde - SIOPS (Gasto Estadual e Municipal); SPO/SE e Fundo Nacional de Saúde - FNS (Gasto Federal) e IBGE (PIB). Tabela elaboração própria. Notas: 1. O efeito da inflação não foi eliminado; 2. Os dados estaduais são os obtidos pela análise de balanços estaduais realizada pela equipe responsável pelo SIOPS; os dados municipais são os declarados ao SIOPS; 3.Os valores do PIB não são os originalmente publicados, porém não contém a série toda reavaliada. Departamento de Economia da Saúde e Desenvolvimento/SE/MS 5 Source: Fabiola Vieira

Speaker JOSÉ ROBERTO RODRIGUES AFONSO Master of science in Economics, carrier economist of BNDES (Brazilian Development Bank) and researcher at UNICAMP (Campinas University) e-mail website - zeroberto@joserobertoafonso.ecn.br - www.zerobertoafonso.com.br It expresses exclusively author s opinions and not those of the institutions he is bond to. The author would likes to thank Vivian Almeida and Kleber Castro for their assistance in research. 51