Will Brazil’s “CPMF” financial transactions tax live another day?

One Brazilian interest group – senators – cheer the CPMF’s abolition in 2007.

For the decade that lasted up to 2007, Brazil levied a tax on financial transactions called the CPMF. It was a biggy: this tax raised nearly $20 billion in its last year of operation before it was killed off by a coalition of people opposed to it, some of whom are in this photo.

The tax had two main purposes: first, raising revenue; and second, affecting behaviour, such as to reduce speculative ‘churn’ in favour of longer-term investment activity. (These are standard motivations for financial transaction taxes.) This appraisal explains the CPMF itself:

“C is for Contribution, a euphemism for tax;
P is for Provisional, meaning temporary;
M is for Movement, meaning withdrawals; and
F is for Financial, meaning bank accounts.

The way CPMF works is simplicity itself. Every Friday Brazilian banks sweep their bank accounts and calculate how much money has been withdrawn therefrom; they then deduct 0.38% of that amount. So, if you wrote checks totalling R$1.000,00 in a week, your Friday account balance would be reduced by R$3,80.  This tax has, since 1997, been imposed on (almost) all withdrawals from bank accounts. The percentage has fluctuated, from 0.2% to 0.38%.”

The tax is gone now, and Brazil is in economic trouble again. As a Brazilian tax law attorney Rebeca Drummond told TJN yesterday, via email:

“We are approaching the center of a recession and politic storm. The legislative branch isn’t willing to cooperate  with the executive branch. Dilma Roussef’s popularity is falling each day. Inflation is higher; the public budget was hit by a huge shortfall. Unemployment is also another problem as well as corruption scandals. Even social programs are being affected.”

The crisis-hit government is seeking new sources of revenue, and the CPMF has come up as a possibility.

Is this a good idea, from a tax justice perspective?

Though today’s TJN blogger isn’t a great expert on Brazil or this tax, preliminary research suggests that this tax could be useful, from several angles. Here’s one:

“Many people hate this tax is because it simply cannot be evaded unless you keep your money under a mattress. Banks are designated agents of the Treasury for tax collection and come under intense scrutiny, so they will deduct that 0.38% every Friday. The second (unspoken) reason many people hate this tax is because the year-end CPMF numbers are made available to the Revenue Service (SRF) to check income tax returns. If you declare R$10.000 of income, but ran R$1.000.000 through your account, that raises a red flag and you may get audited. If there´s no more CPMF, there’s no more reality check. Hooray! If you combine these two reasons, you arrive at the following conclusion: only people who work on an “off books” basis, in the “parallel” economy, truly hate the CPMF.”

And:

“Many suspect that the 2007 congressional vote to abolish CPMF was the work of corrupt politicians to make it more difficult to find where they’d stashed their money.”

On this basis, of course, we’d not be on the haters’ side.

Second, of course, tax revenues can be spent on lots of good things — such as Brazil’s cash transfer programme, known as Bolsa Família, which has been credited with remarkable effects on poverty and inequality.

Third, despite widespread cries that the tax is regressive (that is, it falls more heavily on the poorer sections of society), it isn’t clear that this is the case. As this analysis puts it:

“The evidence on incidence is mixed. The bank debit tax was progressive in so far as it fell on those with a bank account, which are a minority in the wealthiest group of the population (Coelho, 2009:14). However, studies have pointed out that the incidence of the tax was approximately proportional over the entire income distribution, making the tax neither progressive nor regressive (Paes-Bugarin, 2006). Another study (Zockun, 2007), using household consumption data and the incidence of the FTT through the price system, found that it fell proportionately more on lower income families, supporting a claim of regressivity.”

The potential downside of such a tax is that it *could* reduce demand in a fragile economy. But remember: a tax isn’t a cost to an economy but a transfer within it, so it needn’t reduce demand: it could even increase it, depending on how tax revenues are spent.

On balance, this looks like a useful tool. But the interest groups massed against it may make it a hard one to get back onto the books. Just look at Europe’s efforts to do this: as EU Tax Commmissioner Algirdas Semeta put it:

“Strong vested-interest groups have worked tirelessly to impede progress, over-estimating the threats and negative impact of this tax.”