Taxation, Inequality, and the Illusion of the Social Contract in Brazil

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Please cite the paper as:
“Rozane Bezerra de Siqueira, José Ricardo Bezerra Nogueira, (2014), Taxation, Inequality, and the Illusion of the Social Contract in Brazil, World Economics Association (WEA) Conferences, No. 1 2014, Is a more inclusive and sustainable development possible in Brazil?, 5th May to 12th August 2014”



Brazil combines high inequality and high tax yield as percentage of the GDP.This situation contradicts the predictions of two central theories of taxation and democratic politics. The first theory predicts that, within a democratic context, high levels of income inequality should lead governments to carry out significant redistribution. The second theory sees the government’s ability to raise tax revenue as dependent on a social contract between the state and its citizens, and predicts a negative relationship between taxation and social polarization. In this paper, we propose that the theory of fiscal illusion (Puviani 1903; Buchanan 1967) can account for this double puzzle Brazil presents us. We argue that, by heavily relying on the exploitation of fiscal illusion, the Brazilian state has been able to mobilize a huge amount of tax resources without the need of a broad social contract that could lead to more redistribution, effective public services, and growth-enhancing policies. The paper provides some evidence that supports our argument. First, using recent household surveys and a tax-benefit microssimulation model, we show that redistribution by the state is small, and that even the poorest 20% of the households are, on average, net contributors to the fiscal system. Second, we describe some main features of the Brazilian tax system that tend to induce voters-taxpayers to underestimate the cost of government’ activities. For instance, in the past, the inflation tax and debt financing were major instruments and, nowadays, complex and cascading indirect taxation plays a major role as a source of illusion. We then emphasize that the relationship between inequality and redistribution cannot be predicted without an understanding of the way inequality influences state financing: the institutions of taxation matters.

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2 responses

  • Guilherme Tardivo Pulzatto says:

    In Brazil still doesn´t exist a strong felling of Political involvement. The population still sees as a bad stereotype the ones that care and are involved in Politics or directly his politicians.

    As more the Brazilian population improves his quality of life and recovers his citizenship, consequently will start to care more and gain more political consciousness.

    As a matter of fact, this population, that are starting now to gain more consciousness about his citizenship will get more involved on the control of government revenues and more in touch with the fiscal police. This will start to force the Brazilian state to mobilize more effectively this huge amount of tax resources with will lead to a broad social contract and finally to deliver a better redistribution.

    Still Brazil is pretty young, talking about Citizenship, when compare to countries like Italy or German. One day the population will wake up this political consciousness! The question is how much still takes to this happens?

  • José Ricardo Bezerra Nogueira says:

    How long it will take for the Brazilian population to wake up and get out of the fiscal illusion under which it seems to be immersed is a hard question to answer. It all depends on so many factors as to defy a simple answer. One thing though seems pretty clear: The fiscal rules (as also many other rules) will have to change in the direction of making the whole fiscal system much more transparent and accountable to all the voters. The more quickly this happen, the faster (and less traumatic) will Brazil evolve into a mature democracy.