A recommended reading

At a seminar in Tocantins – the newest State of Brazil – during one of the breaks, with much more delicious options than the traditional coffee breaks, I heard a snippet of a dialogue coming from the end of the “pão de queijo” queue. A colleague asked how it was possible, being the income tax almost by definition a progressive tax, that the press had recently reported a famous case of a high income people who paid proportionately less taxes than their employees. Another colleague replied that it probably had to do with exemptions and the way in which the capital was taxed.

I don’t know how the conversation ended, or even if it was resumed after the “salgados“, but it seemed appropriate after hearing the chat, to recommend a reading for those who want to know a little more about that: “Tax Policy and Tax Structure,” the new book by Ceferino Costa, an Uruguayan, collaborator in several CIAT projects and a personal friend for many years.

In one of the chapters, which deals with income tax, Ceferino presents a description of available models, starting with the global system model in which all income are summed, regardless if they are from labor, capital or mixed activities and compensates the losses that may arise from any of these sources in order to determine the income which constitutes the final result for a taxpayer. From this income, and after considering the deductions, taxable minimum, family burden and other applicable costs such as health or education expenses the income tax is determined.., thus considering the personal situation and the contributive capacity.

Later, Ceferino presents the cedular model, which analyses independently the different sources, those from the capital, labor and the mixed ones. Ceferino states that in practical terms, each cedular operates as if it was a separate tax and with examples, demonstrates potential inequities. Examples show that results in the total tax paid by two identical taxpayers subject to each of these models can be very different, and how this last model does not consider the personal situation and therefore it does not take into account the contributive capacity.

The description continues with an analysis of potential double taxation that may occur to tax the income of enterprises and the profit distribution to individuals and the traditional measures taken to lessen or eliminate this double taxation.

Later, Ceferino illustrates the dual tax models applied by Nordic countries that tax differently income from different sources in which usually “capital gains are taxed with proportionally reduced rates”. His description also analyzes the reasons justifying that application, primarily the criteria of potential mobility of capital in a globalized economy. In the same way, he discusses the standard tax or “Flat-Tax“, applied in countries such as Russia, Ukraine or Belarus. For Ceferino, both the dual model and the Flat – Tax, are particular applications of the cedular model.

The book for sure, will not be as tasty as the cassava bread, but its chapters on the structure of taxes will be considered a frequent reference material since in addition to the income tax, VAT, specific taxes to consumption, heritage tax and inheritance taxes are also analyzed.

Greetings and good luck.

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