An evaluation of the 2003 tax reform effort in Brazil

Abstract

This paper provides an assessment of the tax-reform effort launched by the newly elected Lula government in 2003. It analyzes how the envisaged reform had to be changed and scaled down, in the wake of strong political resistance, after a failed attempt to develop a consensual proposal, fully supported by state-governors. The main effective changes are then evaluated. Challenges ahead are discussed at the end.Keywords: tax reform; federalism; political economy; Brazil. JEL Classification: H20; H7; H77.In early 2003, the newly-elected Lula government launched what seemed to be a resolute tax-reform effort. But the proposed reform met strong political resistance and had to be substantially changed. This paper provides an assessment of that experience. It shows how the idea of developing a consensual proposal, fully supported by state governors, proved to be much more difficult than was apparently anticipated. It also looks into how the reform had to be changed and scaled down as much of the resistance turned out to be insurmountable. The main effective changes are then analyzed. THE DEGENERATION OF THE BRAZILIAN TAX SYSTEMAlmost forty years ago, a very commendable tax reform, including a pioneering value-added taxation scheme, was successfully implemented in Brazil.

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