Tax Reform and Income Distribution in Brazil: A Computable General Equilibrium Approach

Abstract

Given the recent debate regarding the need for a reform of the Brazilian tax system, this paper aimed to assess the potential economic and distributive impacts of two different tax reforms. To fulfill this purpose, a static Computable General Equilibrium (CGE) model was used for the Brazilian economy. Two simulations were performed. The first consisted of replacing part of the indirect taxes with a VAT-type tax. The second considered the same union of indirect taxes, but with a lower VAT rate, concomitantly with the resumption of taxation of profits and dividends. The results of both were positive on GDP, household consumption, investment, exports and real wages, especially in the long term. In addition, both simulations implied a drop in income inequality and concentration. However, the second scenario showed much more expressive improvements in this regard. Therefore, it evidences the possibility of a tax reform that improves the economic efficiency and generates income redistribution.