After years of poor government management, the price to pay is huge. Thoughtless policies, increased government spending, funds raised for social programs with limited interests, and no interest in collectivity, led to a deficit hard to wipe out.

It is evident how the current government ignores simple economic concepts, such as the Laffer curve, which shows that increasing tax rates beyond a certain point is counter-productive for raising tax revenue. On the contrary, after a certain point, tax revenue will fall as taxes increase. Besides, with a tax rate close to 40% of the GDP, it might be quite possible that we have reached the peak of the curve.

Despite Brazil’s total economic slowdown, lack of infrastructure, intense bureaucracy that hinders investments, and the regular progress and growth of companies located in Brazil, the federal government keeps raising the tax burden. Decree No. 8426/15, effective since July 1st, is an example. This Decree excluded the benefit of zero-rate PIS [Social Integration Program] and COFINS [Social Security Financing] contributions on financial income. As of July, companies that determine their contributions under the noncumulative taxation, even if only for part of their revenues, must apply the PIS and COFINS contributions to their revenue, at the rates of 0.65% and 4% respectively.

Obviously, restoring the levy of such contributions on financial income — which was announced in April, when the Decree was published — stirred up a huge debate and countless complaints from taxpayers, because, since 2005, PIS and COFINS have not been applied on such income. Besides, the Decree did not include the possibility of offsetting PIS and COFINS credits against financial expenses. Thus, in order to lessen taxpayers’ dissatisfaction, the government published Decree No. 8451/15 which (i) determined the concept of high fluctuations in exchange rates — dollar exchange variation greater than 10% during the month — so that the companies that had chosen the “accrual basis” for taxation of the foreign exchange variation may change it to “cash basis”; (ii) kept the zero rate for financial income from exchange-rate variations in exports of goods and services and from liabilities of legal entities; and (iii) also kept the zero rate for financial income from hedging transactions performed on the Stock Exchange, from goods and forward contracts, or on over-the-counter market.

However, such benefit is not that comprehensive as it does not apply the zero tax rate to some operations, such as exchange-rate variations regarding foreign suppliers, or derived from rights of Brazilian legal entities, including loans and financings, and also the hedges practiced outside the Stock Exchange or the organized over-the-counter market. Furthermore, it is still to be discussed whether it was constitutional for the Executive Branch to restore taxation upon financial income by enacting a Decree — in violation of art. 150, I, of the Federal Constitution — and to exclude the principle of noncumulative taxation, by taxing financial income without the respective credit against financial expenses. It is also open for discussion whether increasing social contributions — without explaining if the gains from taxation will be used in investments in the social security or health sectors, or if they will be used to pay for government spending — is a legitimate action. Also to be discussed is whether there is any justification to increase the social contributions after the Federal Government presents its budget containing expenses incurred in the social security and health sectors, which are funded by PIS and COFINS. This requires levying those contributions upon the financial income only next year, if previously provided in the budget. These issues must certainly be submitted to the Judiciary, which will analyze them and announce whether levying PIS and COFINS upon financial income is constitutional.