Social security taxes and the reform of the Brazilian tax system

Abstract

This paper shows that social expenditures in Brazil are financed with the revenue of indirect taxes, mainly social security taxes. Since the tax rate is levied on the enterprise¿s total revenue and/or the payroll, the fiscal burden is cumulated throughout the productive chain, with final effect upon the market prices of goods and services. This procedure causes relative price distortions that bring about undesirable results on resource allocation, the labour market and the competitiveness of the Brazilian products on the international markets. In this sense, the paper emphasises the need for a tax reform that takes into account the cumulative effect of fiscal incidence, namely the effects created by social security taxes, in an attempt to modernise the Brazilian tax structure.