Addressing inequality in Brazil: taxation and multi-sectoral reforms

An interview with Marcelo Medeiros


In this interview with the Inclusive Policy Lab, Marcelo Medeiros discusses inequality in Brazil, and reforms in taxation and other sectors to tackle the same. You can read his article, Income inequality in Brazil: new evidence from combined tax and survey data, in the World Social Science Report 2016 here.

How critical is the reduction of inequalities in Brazil? Why?

Medeiros: Brazil is a very unequal country. Tax data show that is more unequal than what we previously thought. Such a high inequality is dysfunctional: it affects the economic performance and even threatens democracy, by concentrating political power. But above all, this inequality is unjust, as much of it results from various privileges that cannot be morally justified. Reducing inequality is not important for Brazil only, it is important in the entire world. In the next two or three decades it will be physically unsustainable to make the global poor reach, via growth, the levels of consumption of, say, the richest 10% richer of the world. The environment simply cannot stand such a pace of growth: resources are scarce. Equality will be increasingly important to improve wellbeing; it must replace the role growth had in the last century to avoid a serious compromising of the coming generations.
During the past decade specialists seemed to believe that inequalities were shrinking in Brazil yet more recent studies have showed that, if anything, inequalities have been on the rise during this period. What factors led to this misinterpretation? Is there a lack of understanding of the issue at hand?

Medeiros: This is all about data. All the existing data we have show that inequality of labour earnings declined for almost two decades, from the mid-1990s to the mid-2010s. Yet, when capital incomes enter the calculation, the picture changes. The combination of tax and survey data suggest that [the] decline was not as pronounced as it appeared. Additional data from the national accounts reinforce that. But this new data and methods have their weaknesses. Much more important than the exact trends is the conclusion that we must revise what we knew about inequality in Brazil. We - myself included - had underestimated the role capital incomes play in inequality, and this changes a lot, from the theories to explain it to the solutions we can propose to reduce inequality.  
You argued that the Brazilian taxation system, which is both inadequate and outdated, needs to be truly reformed and could take on a more significant redistributive role in the Brazilian society. How do you see this agenda progressing in Brazil? How feasible is it? What concrete reforms would you see fit?

Medeiros: Designing a tax system is far from trivial. But there is a consensus that Brazil needs a tax reform urgently. The country taxes production and consumption more than income, property and inheritances. It taxes wages much more than it taxes capital incomes. I believe that everyone in this debate agrees that this is not good, that this structure must be inverted. The main problem is not to find out what to do, it is to have the political force to change things. A reversal tax burden would have important distributive effects and, therefore, huge political consequences. There is political resistance to change the tax system, this resistance comes from different actors and ideological points of view.
A lot of your work focuses on taxation and income inequality. But you advocate for a multi-sectoral package of reforms and policies to reduce inequalities in Brazil. Which are the key ones?

Medeiros: Is there a silver bullet to make a developing country grow to the point of reaching the income levels of a rich country? The obvious answer is no, there is no simplistic way of making an economy grow sustainably. The same applies to inequality: there is no magic solution to reduce inequality dramatically. Actually, long-term history suggests that falls in inequality only happen when the "four horsemen of Apocalypse ride", to use the metaphor of Walter Scheidel, that is, under catastrophic times that cause large disruptions of the status quo. So, unless one intends to call Pestilence, War, Famine, and Death for a ride, it is better to keep in mind that reducing inequality requires a broad series of measures and is not a simple thing to do. There are no "key ones", in the sense of a clear to-do list, but of course it will require changing the structure of opportunities for future generations and reshaping the distribution of outcomes for the present ones. It will not be education, nor taxation, changes in macroeconomic policy nor reduction of privileges, alone, what will do the job; it will be a mix of these measures.
Is education not a solution?
Medeiros: By no means is education a panacea. No matter how much you invest in human capital, this will not reduce inequality substantially in a reasonable timeframe. There are three simple reasons for this. First, there is demographic inertia. It is too hard to educate adults who have jobs and families. Being realistic, only the young can be reached by educational reforms. This means that even if a country implements fantastic educational reforms today, it will take about half a century to have a highly educated labour force. In the first two decades, only a minimal share of the workers would have been through this much improved educational system. Second, education is important, but in Brazil it is university education that really matters for inequality. It is not realistic to believe that in the next decade you will ensure university education for all your students, particularly in a country that still struggles to do that for secondary schooling. Third, but no less important, there is a significant part of inequality that is determined by capital incomes, and it is not clear that education can change that distribution.
And what about taxation?
Medeiros: Taxes and snake oil do not do miracles. There are limits, political and economical, to [what] you can do with taxes. Brazil can and should make its taxes more progressive. In fact, the personal income tax is already possibly the most egalitarian policy Brazil has, at least in terms of direct impact. Its effects are about twenty times more redistributive than those of Bolsa Familia, the conditional cash transfer program that receives a lot of attention. So it is clear that taxation is an important component of an egalitarian package. But the problem does not end here. It also depends on the way these taxes are spent. A substantial amount of the money is spent on pensions and on interest rates paid to public bonds, both of which are regressive. But you can't simply change your pension system and your monetary policy overnight.

      Marcelo Medeiros is a professor at the Department of Sociology of the University of Brasilia. His research focuses on income inequality in developing countries, both today and in historical perspective.
This interview has been edited for this platform.
The author is responsible for the facts contained in the article and the opinions expressed therein, which are not necessarily those of UNESCO and do not commit the Organization.