Brazil’s government has proposed a tax exemption for individuals earning up to 5,000 reais monthly, offset by new taxes on high earners and dividends sent abroad to improve middle-class incomes. The plan, part of President Lula’s campaign promises, must pass Congress for implementation by 2026. The government believes it will not negatively impact investor sentiment while aiming to ensure fiscal neutrality.
On March 18, Brazil’s government introduced a plan that exempts individuals earning up to 5,000 reais (approximately $881.27) monthly from income tax, aiming to bridge the revenue gap through levies on high earners and profits sent abroad. This proposal is pivotal for President Luiz Inacio Lula da Silva amidst declining approval ratings, and it is part of a broader initiative to enhance disposable income for the middle class.
The administration’s plan marks a decisive move to increase financial relief for Brazil’s working class, including payroll credit changes and eased access to workers’ severance funds. Economic Policy Secretary Guilherme Mello indicated this initiative could enhance growth potential without being inflationary, emphasizing the government’s assertion of fiscal neutrality regarding the tax exemption plan. Congress must approve the measure this year for it to be implemented by 2026, coinciding with presidential elections.
Moreover, the bill includes a 10% withholding tax on dividends sent abroad, expecting to generate 8.9 billion reais annually. Tax Revenue Secretary Robinson Barreirinhas stated that this move would not deter investors, as taxes paid in Brazil can typically be credited against local liabilities abroad. The treasury also noted that foreign investors could receive a refund on taxes paid under certain conditions, maintaining a favorable climate for international finances.
To counterbalance the tax exemption for lower-income earners, the government proposes a minimum effective tax for high-income individuals earning above 600,000 reais annually. This tax rate, which escalates 10% on earnings over 1.2 million reais, is projected to yield an additional 25.22 billion reais per year. The threshold for income tax exemptions will increase, reflecting adjustments in the federal minimum wage, which currently protects those earning below two minimum wages. Finance Minister Fernando Haddad described the bill as “balanced” fiscally, while simultaneously noting it includes provisions for political negotiation in Congress.
In conclusion, Brazil’s government has proposed a significant income tax exemption for low earners to improve economic conditions for its middle class amid declining popularity for President Lula. To fund this initiative, new taxes on high-income individuals and profits sent abroad are expected, while assuring that investor sentiment will remain stable. As the measure requires congressional approval for implementation by 2026, ongoing negotiations will be necessary to finalize its provisions. The balanced approach aims to enhance public finance while promoting tax equity.
Original Source: www.marketscreener.com
