Tax Evasion a Way of Life in Brazil; Soaring Rates, Lax Enforcement Lead Many to Cheat Government

The Washington Times (Washington, DC), July 13, 2004 | Go to article overview

Tax Evasion a Way of Life in Brazil; Soaring Rates, Lax Enforcement Lead Many to Cheat Government


Byline: Kenneth Rapoza, THE WASHINGTON TIMES

SAO PAULO - It's a jungle out there, say Brazil's business owners. Stringent labor laws, high interest rates and heavy taxes have led to rampant smuggling and tax evasion, some of it tied to international organized crime.

The result is a growing civil-disobedience movement among the country's business class and years of falling incomes and underdevelopment in a nation that rivals China for foreign investment capital.

"The market has become totally predatory," said Sergio Garcia Ozorio of Brazil's small-business association. Mr. Ozorio once owned a construction-materials company and cheated the system himself. "The informal economy is growing simply because there's not enough jobs to go around, and high taxes lead companies and individuals to do whatever they can to survive," he said.

For example, payroll taxes in Brazil consume an average 42 percent of an employee's income, compared with about 24 percent in the United States, and corporate taxes average 23 percent, compared with an average 14 percent in the United States.

Sales taxes vary widely by state and type of purchase. In Sao Paulo state for cigarettes, it's 72 percent. Beer is taxed at 56 percent. For soap, add 42 percent. And the tax on a new car is 44 percent.

Tax receipts for 2003 were the equivalent of 35.6 percent of the country's gross domestic product, rising from the equivalent of $154 billion in 2002 to $174.3 billion in 2003, breaking a seven-year growth record. Roughly $50 billion a year is thought to be lost to tax evasion.

Businesses here pay more taxes than their counterparts elsewhere. And the "informal economy" is growing because of it.

The informal economy consists of workers earning money tax-free, often as street vendors called "camelos" illegally selling everything from toothbrushes to pocket computers, as well as legitimate businesses that report lower sales figures to avoid taxes.

The informal economy has grown so large that it has become one of the chief barriers to development, according to a study made public in June by McKinsey & Company, an international consulting firm with offices in Sao Paulo. Per-capita income over the past 20 years has grown a nominal 0.5 percent even in boom times, though this doesn't include the "informal economy."

Thirty-three percent of the population lives on less than $2 per day, according to United Nations Development Program data this year, and about 45 percent are malnourished, according to May data in a study on malnutrition and household debt by the Brazilian Institute for Demographics.

Companies working within the legal system produce twice as much as those operating informally, according to McKinsey. They are responsible for the best-paying jobs, and their employees have legal rights. Yet they are increasingly losing out to competitors that pay smaller, tax-free salaries.

"Informality is growing like a cancer," said Emerson Kapaz, president of the Brazilian Institute for Ethical Competition, set up by businesses trying to counter tax evasion and patent violations. Mr. Kapaz said the formal sector has come to accept the tax-evading practices of their competitors, hurting Brazil's legal economy and aiding corruption.

"It's not exactly the Boston Tea Party, but a large part of the population has no means to survive or to compete unless they work illegally," Mr. Kapaz said.

"What are the consequences? Companies are up to their neck in taxes, facing unethical competition. If we do nothing, we are headed for a society where organized crime has more power than the state, and citizens are prisoners of a parallel economy that barely serves their needs. We are mobilizing to put an end to this."

Though the informal economy makes statistics unreliable, it is believed to provide 40 percent of Brazil's income, double the rate of 133 countries studied in the World Bank's "Doing Business 2004" report.

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