In the State of the Union address last week President Obama unveiled a plan to reduce economic inequality by changing the U.S. tax structure. Specifically, he wants to increase the capital gains tax which largely applies to the wealthy. Yet the U.S. is not alone in trying such a tactic; Brazil is also looking to lowering inequality by raising taxes.
On Jan. 20, 2015, the Brazilian government announced it intended to raise taxes on fuel, imports, credit (loans to individuals and imports) and cosmetics. Additionally, President Dilma Rousseff rejected calls for an income tax break. The government anticipates it will be able to raise $7.5 billion from these adjustments and avoid losing $2.7 billion from not approving the tax break.
Brazil is trying to recover from the economic decline that took place during Rousseff’s first term, when the budget deficit grew, growth slowed to a crawl and inflation spiked. Joaquim Levy, Brazil’s newly appointed finance minister, backed the new tax proposals by saying they will “re-balance the economy, particularly from a fiscal perspective with the aim of improving confidence.”
The promise and progress Brazil had shown as one of the world’s leading developing economies has stalled. Its credit is rated just one level above the lowest possible. The growth it doesn’t want — inequality — is surging, and the kind is does want — economic — is shrinking. On the positive side, these announcements indicate that Brazil has realized what is has tried before didn’t work, so it should try something else. Hopefully, with the backing of government and industry, especially its oil producers, Brazil will convince the public that these tax moves are for the best.
Who knows, the tax hikes might even work, moving the economy back in the right direction. The United States would be wise to follow a similar path.
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