The government intends to ensure the collection of at least 10% Income Tax from the richest taxpayers. To do this, you want to include in the account amounts received as dividends from companies, which have been exempt since 1995.
“It is a new concept, of minimum Income Tax, which considers all of the person’s income and what they paid in Income Tax in that year”, said this Thursday (28) the Minister of Finance, Fernando Haddad. “It deals with to seek tax justice. We will deliver a fair, modern and progressive tax system to the country.”
The proposed reform of income taxation announced by the minister does not provide for a uniform correction of the IR table. A device will limit the scope of the announced exemption of R$5,000, so that people with income above that will have less tax relief, or even no relief at all: for those who earn more than R$7,500, it will be worth a different exempt range, of just two minimum wages.
The objective is for the changes to come into force on January 1, 2026, when the consumption tax reform also comes into force – which is still being processed in Congress.
“Reforming income is simpler than reforming consumption. It is a single tax, a federal tax, neutral from a fiscal point of view”, said the minister. “It’s a bill, it doesn’t require a constitutional amendment. We understand that it could be processed next year, as it has a lighter legislative agenda and it’s not an election year.”
What will income tax be like for the richest?
In a press conference held alongside other ministers, Haddad stated that he intends to ensure an effective tax rate of up to 10% on all taxpayers earning more than R$50,000 per month, or R$600,000 per year. This account will include income from salaries, rent, dividends and interest, according to the Treasury holder.
The minister even gave an example in which taxpayers with an income of R$600,000 will have to pay at least 10% in effective tax per year. Later, however, the Executive Secretary of Finance, Dario Durigan, stated that there will be a staggering of the minimum rate, which will start close to zero and reach a ceiling of 10% for those earning R$1 million or more per year.
The idea is to ensure that these taxpayers pay a minimum amount of tax. If a taxpayer with an annual income of R$1 million has collected less than 10% of this throughout the year (R$100 thousand), he will have to make a supplement to reach 10%.
On the other hand, anyone who paid tax above the determined minimum during the year will not be entitled to a refund.
According to a presentation prepared by the Treasury, today the richest 1% in the country pay an effective income tax rate of 4.2%. In the richest 0.01% group, the fraction actually paid in tax is 1.75%, according to the document.
Exemption from income tax for health reasons will be limited
Haddad also announced that he will correct what he called “distortions” related to health. According to him, the government will limit income tax exemptions for health reasons – in the case of serious illness, for example.
Only taxpayers who earn up to R$20,000 per month will be entitled to the benefit. On the other hand, the taxpayer’s health expenses will continue to be 100% deductible from the IR calculation base, he assured: “Everyone can deduct health expenses in full. If you spent R$1 million for a health treatment, you will be able to deduct. This rule will not change”.
Today, exemption from IR for health reasons is granted to people with certain diseases or specific conditions, such as cancer, AIDS, severe heart disease, Parkinson’s disease, multiple schloresis and others.
Provided for by Law 7,713/1988 and regulated by instructions from the Revenue, the benefit applies only to retirement, pension or retirement income. It does not apply to salaries or other income.
Taxing the richest will offset the R$5,000 exemption from Income Tax
The new taxation will serve to compensate for the income tax exemption for those earning up to R$5,000, a campaign promise by President Luiz Inácio Lula da Silva (PT), and guarantee the “neutrality” of changes in the tax, so that the collection will not increase or decrease.
“The income reform bill presupposes tax neutrality and commitment from leaders [do Congresso] to vote on a project in which this principle is respected. It’s not about changing the level of tax collection, it’s about seeking tax justice”, said Haddad.
According to him, the waiver with the R$5,000 exemption is estimated to be R$35 billion – and not R$70 billion, as some vehicles reported. “The combination [de medidas] it will allow compensation”, stated the minister, seeking to dispel fears of the financial market, which on Wednesday (27) and this Thursday reacted badly to the news of the changes in IR, with the dollar soaring and the Stock Exchange falling.
IR table will not have uniform correction and exemption of R$5,000 will not benefit everyone
Although Income Tax is charged progressively, with each rate affecting a certain portion of the taxpayer’s income, the government will adopt a mechanism to reduce the tax impact of the R$5,000 exemption. This will limit the gain that taxpayers with higher incomes would have with the new exemption range.
If conventional IR rules were applied, a person who earns R$9,000 per month would not pay tax on the portion of their income that goes up to R$5,000, with only the remaining R$4,000 being taxed. Likewise, for an income of R$15 thousand, taxation would only apply to R$10 thousand, that is, income above R$5 thousand.
However, this logic will not apply to the new R$5,000 exemption. Some taxpayers will not be entitled to it.
“Exemption up to R$5,000 will in fact benefit everyone who earns up to R$5,000, and everyone up to around R$7,500, because they will pay a slightly lower rate than they pay today,” said Haddad. “The way the IRS is doing it is ensuring that, by updating the exemption range plus the discount that is given, it will benefit somewhere between 70% and 80% of salaried workers.”
In practice, anyone earning up to R$5,000 will benefit from the full exemption. Anyone who earns up to R$7,500 will benefit from part of it. And there will be no relief for anyone earning above that.
“The R$5,000 exemption fully reaches those who earn up to R$5,000, with use of the benefit for those who earn up to R$7,500, so that we don’t have an abrupt break. So that those who earn R$5 .1 thousand will not pay, very quickly, much more Income Tax than someone who earns R$4,990”, said the Executive Secretary of Finance, Dario Durigan. “Those earning more than R$7,500 will have an exemption up to two minimum wages.”
Apparently, the Revenue will apply a device similar to what has already been adopted in the IR exemption for those earning up to two minimum wages.
Today, anyone who earns a maximum of R$2,824 is entitled to a type of “early refund” of IR, which ensures exemption from this amount. For those earning above this, however, the standard exempt range applies, which is much lower: R$2,259.20. This mechanism was an “innovation” introduced by the Lula government to limit the fiscal impact of corrections to the IR table.
With the exception of the exempt band, the Income Tax table has not been corrected since 2016. During this period, inflation measured by the IPCA rose 56%.
Haddad is questioned about his protagonism and political ambitions
At the press conference, Haddad was questioned by journalists about his leading role in announcing the spending package, which surprisingly included the Income Tax reform, and future political ambitions.
He first announced the measures on national radio and TV on Wednesday night, and for many observers it had the tone of a political campaign.
The minister responded that the statement was a request from President Lula, with the aim of clarifying the points of the spending cut package. “It is my duty to inform and clarify, but I am not looking for anything other than to grow with responsibility and social commitment”, he stated.
Rui Costa says the inclusion of Income Tax was no surprise
When approached about the simultaneous announcement of cost containment with the R$5,000 exemption from IR, the Chief Minister of the Civil House, Rui Costa, sought to defend the government.
“What is being done today is to respond to a market that, according to the text they publish, was pricing in the present a future imbalance in public accounts. And here we are ensuring that this long-term imbalance will not occur”, said Costa.
According to him, on Wednesday the market had released “fake news” that the reform would be valid for 2025. “Putting it in 2025 would be breaking predictability. What was said in the campaign and inauguration is being fulfilled, there is no surprise” , he stated.
In his assessment, there was no break in expectations regarding the announcement of the income reform. “Whoever bets against Brazil will lose, because this country is growing consistently and attracting international investment consistently. President Lula will not give up fiscal responsibility and all adjustments will be made, if necessary, in the short, medium and long term to guarantee the fiscal framework”, stated the minister.
Costa was asked about attempts by him and his colleagues to dehydrate the package. He responded by stating that there are no “bad wolves and little red hats” in the government and that the package is consensual.
Haddad, in the same way, said that discussions are natural when it comes to measures that involve so many areas of the government, but that the entire team is aligned regarding the proposals presented.
This report was updated to correct the effective Income Tax rate on the richest that had been cited by Minister Fernando Haddad. He used an example in which a taxpayer with an income of R$600,000 per year would have to pay at least 10% of income tax. Later, however, the department’s executive secretary, Dario Durigan, clarified that the rate for this income range will be lower and will gradually rise until reaching the ceiling of 10%, charged only to those with income exceeding R$1 million in the year.
Updated on 11/28/2024 at 16:41
