Brazil’s government has proposed a plan to exempt individuals earning up to 5,000 reais monthly from income tax, intending to cover the revenue gap with new taxes on high earners and dividends sent abroad. This initiative aims to boost middle-class disposable income as President Lula seeks to regain popularity. The bill requires congressional approval to take effect in 2026, though amendments are anticipated due to lobbying from high-income stakeholders.
On March 18, Brazil’s government announced a plan to exempt individuals earning up to 5,000 reais ($881.27) per month from income tax. This initiative aims to cover the resulting revenue gap through new taxes on high earners and on profits and dividends remitted abroad. President Luiz Inacio Lula da Silva’s administration has made this proposal a key focus as he seeks to regain popularity amidst declining approval ratings.
The proposal represents the most robust measure in a series of initiatives by the administration intended to increase disposable income for Brazil’s middle class. This includes adjustments to payroll deductions and enhanced access to workers’ severance funds. Economic Policy Secretary Guilherme Mello mentioned the challenge of determining inflationary pressures from single measures, asserting that improved income distribution can enhance growth potential without inflation.
The proposal must secure approval from Congress within the year to be enacted in 2026, which coincides with Brazil’s presidential elections. Following the announcement, lawmakers expressed intentions to analyze the bill promptly, although significant amendments are expected due to lobbying pressures from wealthier constituents. House Speaker Hugo Motta indicated that changes would likely aim to enhance the proposal.
A 10% withholding tax on profits and dividends sent abroad will be included, anticipated to generate an additional 8.9 billion reais annually. Tax Revenue Secretary Robinson Barreirinhas emphasized that investors should not be adversely affected, as many countries permit tax offsets. The measure would alter current protocols where dividend remittances are tax-free in Brazil.
Furthermore, to balance the tax exemptions for the middle class, the government seeks to impose a minimum effective tax on high-income individuals, applying to annual earnings over 600,000 reais. The proposed rates would gradually increase, with a top rate of 10% for earnings surpassing 1.2 million reais per year, expected to boost revenue by 25.22 billion reais. Current exemptions for individuals earning less than two minimum wages will also be adjusted to reflect a recent hike in the federal minimum wage.
Finance Minister Fernando Haddad described the bill as “balanced” in fiscal terms, yet acknowledged that tax exemptions might not fully match anticipated revenue gains. The government aims to balance individual tax relief with equitable contributions from high earners, although the path to enactment remains fraught with potential challenges in Congress.
Brazil’s government is implementing a broader income tax exemption plan aimed at benefiting individuals earning below 5,000 reais monthly. By introducing taxes on wealthier individuals and dividends sent abroad, this initiative seeks to enhance disposable incomes while ensuring fiscal neutrality. The outcome remains contingent on legislative approval amidst potential amendments, reflecting the complexity of balancing equity and growth.
Original Source: www.marketscreener.com
