Indirect Taxes in Brazil: Assessing the Distributional Effects of Potential Tax Reforms

p class="MsoNormal"This article uses recent expenditure survey data to investigate how indirect taxes are paid across the Brazilian population. It applies a novel approach to estimate the effective tax rate by computing the specific cumulative taxes levied on thousands of items available in the data set. The findings show that, for every BRL 100 of indirect tax revenue, the first and second deciles pay BRL two and BRL three, respectively, while the ninth and tenth deciles pay BRL sixteen and BRL thirty-three, respectively. Meanwhile, indirect taxes are found to be regressive: they represent between 23 and 45% of income among the poorest households and between 13 and 19% among the richest. Simulations of a value-added tax reform suggest that it could be inequality reducing both horizontally and vertically. A flat value-added tax accompanied by excise taxes on fuel items, alcohol, and tobacco that yield final simulated prices equal to the status quo would still lead to lower overall expenditures. Households would spend 2.8% less on average with those in the bottom (top) decile spending 7.0% (1.5%) less. The burden placed by indirect taxes among the poorest households appears to be among the highest in a large set of countries.o:p/o:p