Brazil: Against the Renewal of the Tax on Financial Transactions (CPMF)

Today, the lower chamber of the Brazilian Congress is voting on the possibility of renewal for four more years of the tax on financial transactions (CPMF –  Contribuicao Provisoria sobre Movimentacao Financeira). As always, there are those against and those in favor of the renewal. But such groups are quite unbalanced. There are only two sectors in the Brazilian economy which have great interest in the renewal of the tax: the banking sector and the government.

The CPMF is a considerable grain of sand in the engine of banks competition, it hinders clients the possibility of biding banks for higher rates and lower fees. But even if the elimination of the CPMF could increase the competition among banks, and in theory, reduce their profits, the banking sector in Brazil is healthy and wealthy enough to cope with such marginal challenge. The main problem is our public sector, a corrupted and inefficient giant with no interest in eliminating this hundred percent inefficient tax.

These days I read someone arguing that the CPMF was a progressive tax because the rich people are the ones who do more financial transactions. He definitely did not understand the damage that such a tax causes along the economic activity. The government does not have even one plausible alibi in favor of the CPMF. The most innocent one proclaims that this tax has the function of fiscal supervision, as it is able to define the transaction level during a certain period. But if the banking system already has the tax basis there is no need to have a positive rate on it to measure the amount transacted. That’s obvious!

The CPMF is a tax which testifies against the intelligence of Brazilian society. According to specialists the lower chamber has “already” decided for the renewal of the tax, and, unfortunately, it will be very difficult for members of the opposition in the Senate to have enough strength and willingness to vote against it. Another great shame for all of us, Brazilians!

5 Responses to "Brazil: Against the Renewal of the Tax on Financial Transactions (CPMF)"

  1. Guest   September 20, 2007 at 11:41 am

    By someone do you mean Claudio Haddad? If yes, why don’t you mention his name? Debate is good if you give names to the people, especially those that you disagree. What about the tax they just created in Mexico? It is similar to the CPMF? Is that a shame too?

  2. Guest   September 20, 2007 at 12:14 pm

    I really did not remember that was Claudio Haddad´s text. I have read so many articles regarding the CPMF that have not checked his text again. I would have no problems to mention him and his text. Any case,I apologyze for my not intentional mistake.

  3. Guest   September 21, 2007 at 8:21 am

    suppose you eliminate this distortionary tax: then what would you replace it with to make it tax neutral. I.e. lets assume you are not able to cut spending but need to replace one tax with another one.

  4. Mick Rolland   September 24, 2007 at 11:11 am

    Probably an increase in final consumption taxes or Value Added Tax, or energy taxes -particularly if one considers that energy consumption is inelastic and may have negative externalities- would be much better than a financial transactions tax.   A tax on an ubiquitous intermediate input (such as financial transactions) is one of the most distortionary taxes that exist. It is a cascading tax and also hampers the development of a financial sector and an efficient and transparent payments system. Its long run effects are very negative.   However, some tax agencies like this tax as it is very easy to collect, takes in massive revenue, and its long run side-effects may not be apparent. In practice, the desirable removal of such a tax is politically viable only within the framework of a broader fiscal reform (that may address expenditure too).

  5. Ricardo Meirelles
    Ricardo Meirelles   September 24, 2007 at 2:39 pm

    Thanks Mr. Rolland for your contribution. In practical terms, considering that the ICMS (Tax on Distribution of Goods and Services), current Brazilian proxy for the VAT, is of competence of the state government, we could choose any tax of the federal taxes menu. Any of them would be less distortionary than the CPMF. In any case, the best choice would be the federal income tax. But in the current Brazilian situation the assumption of replacing the CPMF is what must be contested. We don’t even need to replace it. The recent report of SRF (Federal Revenue Office) shows that in the first seven months of 2007, the growth of the federal tax collections, in real terms, has been of nearly ten percent. This suggests that such increase will surpass the CPMF´s revenue in 2007. Based on this subject, Rogério Werneck has published on O Estado de São Paulo last Friday (Sept, 21th,2007), an interesting article entitled “Janela de Oportunidade” (Window of Opportunity).