LAC Tax Forum The Role of Tax System in Reducing Income Inequality and Promoting Social Cohesion Panama September 16-17,

2 Topics 1.Measurement of the Tax Burden 2.International Comparison 3.Social Impacts

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4 Indirect Taxes (% of Food Expenditures)

5 Share of Federal and State Taxes on Food Expenditures

6 Taxes on Food Expenditures (% of Total Household Current Expenditures)

7 Main Results  The tax burden on food expenditures is highly regressive in Brazil as a whole. That is, the share of household current expenditures levied by taxes on food consumption is far greater for lower-income families than for higher-income families. This regressivity is present throughout all the states of Brazil.  On average, the tax burden on foods is mostly due to the state sales tax ICMS (56%). However, federal taxes and contributions (IPI, PIS and COFINS) also play a relevant role (44%).  The incidence of four distinct taxes and the diversity of state and federal legislation generate a multiplicity of tax rates. On average, in each state there are 30 possible tax rates applying to food sales.

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9 Value Added Tax (VAT) on Foods (%) Exceptions: Mexico - Processed foods Portugal – Non-essential foods: 12% Ireland – Ice creams and pastries: 4.4%-13.5% Cyprus – Ice creams, chocolates, pastries and biscuits: 5%-15% Malta – Processed foods: 5% England – Precooked meals, ice creams and chocolates CountryVATCountryVAT Germany7Italy4 Austria10Latvia18 Belgium6Luxembourg3 Cyprus0Holland6 Denmark25Hungary15 Slovakia19Malta0 Slovenia8.5Mexico0 Spain7Norway12 Estonia4Poland3 Greece9Portugal5 Finland17Czech Rep.5 France5.5Sweden12 Ireland0USA*0.66 England0 Average**7.11 Sources: European Commission (2006), OECD (2005), FDA (2006)

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11 Tax Exemption for Food Expenditures: Predicted Impacts on Poverty and Indigence State Percent Reduction in Poverty Percent Reduction in Indigence Absolute Reduction in Poverty (persons) Absolute Reduction in Indigence (persons) Pará11.46%26.26% 226,688 79,305 Pernambuco6.61%25.07% 214, ,054 Bahia5.09%15.84% 223, ,167 Minas Gerais8.05%18.94% 198,751 53,049 Rio de Janeiro3.49%7.71% 122,288 57,006 São Paulo7.73%23.59% 515, ,703 Paraná5.08%23.10% 53,476 25,905 Rio Grande do Sul9.37%24.22% 80,148 18,661 Mato Grosso do Sul4.70%10.85% 25,788 2,883 Goiás4.88%12.21% 84,566 21,408 Total6.60%18.08% 1,745, ,141

12 Tax Exemption for Food Expenditures: Predicted Impacts on Inequality

Poverty (% of Population) by Region North South Midwest 13

Indigence (% of Population) by Region North South Midwest Northeast Southeast 14

Gini Index North South Midwest Northeast Southeast 15

16 Main Results  In the ten states that were analyzed, a tax exemption for foods could have significant impacts on poverty (6.6% reduction) and indigence (18.1% reduction). Extending this result to the whole country, 2.5 million people would be brought out of poverty and 960 thousand people out of indigence. This tax exemption would also reduce the Gini index in to points.  As a comparison, over the entire period, there has been a 39.7% reduction in the poverty rate, and only a point reduction in the Gini index.  Over the entire period, the decline in the poverty rate has been only 7.1 percentage points, while the Gini index remained stable at  Overall, the tax exemption for food sales would bring a substantial contribution to the ongoing endeavors to reduce poverty and inequality in Brazil.