Academic journal article Brazilian Political Science Review

State Transfers, Taxes and Income Inequality in Brazil *

Academic journal article Brazilian Political Science Review

State Transfers, Taxes and Income Inequality in Brazil *

Article excerpt

This study aims to measure the net contribution of direct flows of income to and from the State (wages, transfers, and taxes) to income inequality. Our focus is not only on public expenditures but also on the collection of resources by direct taxation. Specifically, we simultaneously consider all three major types of income flows between the State and families: taxes, transfers and payments to public sector workers. We limit our analysis to the direct monetary income flows between families and the State. This excludes the distributive impacts of three major types of State intervention: taxes, transfers to firms and the provision of public services. The former is an indirect income flow; whereas, the latter is a non-monetary transfer.

We are testing the hypothesis that the State plays a perverse distributional role in Brazil. The state contributes to a large share of income inequality, as it operates its wage and social and tax policies in a three-tiered fashion: on the first level, it supports an elite group of workers in the public sector earning high wages and with pensions; on the second level, it provides intermediate pension benefits and unemployment insurance only to formal workers in the private sector; and finally, on the third level, it gives little weight to redistributive measures such as taxes and basic income policies for the low income masses in the informal sector.

This hypothesis assumes that the regressive actions of the State are a typical result of path-dependency in politics. Since its inception, the Brazilian welfare state has followed a corporatist model that offers protection to workers in the more developed sectors of the labor market-including State workers-but excludes most of the general population from it. This arrangement further entrenched into power certain strongly organized groups, such as state bureaucrats and public servants, which exert considerable influence upon a large share of the State's social spending and wage policies.

Inequality is often associated with weak public institutions. We, however, offer a different argument. We maintain that powerful public and private institutions can, in fact, be worse than weak ones. If the quality of institutions is understood only as a combination of their stability, autonomy, and size, then we argue that it is not the quality of the institutions that matters most to inequality.

It is also common to link social policies to inequality reduction, particularly by stressing that larger welfare states tend to result in lower inequality. Our study does not endorse this view, as it is possible to have a large welfare state that, in fact, provides the bulk of its benefits to the upper middle classes, thereby increasing the level of inequality.

Previous comparative studies on developed countries, predominantly on countries of the Organization for Economic Cooperation and Development (OECD), have shown that the State reduces inequality. These studies found that public work contributes to reduced inequality (BLAU and KAHN, 1996; GUSTAFSSON and JOHANSSON, 1999; MILANOVIC, 1994), that strong unions and centralized bargaining of wages typical of public workers are determinants of lower levels of income inequality (CHECCHI and GARCÍA-PEÑALOSA, 2010; GOTTSCHALK and SMEEDING, 1997; GUSTAFSSON and JOHANSSON, 1999) and that corporatist welfare state policies are more capable of reducing inequality than targeted policies because of the "paradox of redistribution", that is, (contributory) universalism legitimizes more spending than targeting and it is the level of expenditures that matters most to inequality (GOUDSWAARD and CAMINADA, 2010; KORPI and PALME, 1998; MAHLER and JESUIT, 2006; SMEEDING, 2005). Other studies have identified that taxation, particularly direct taxation, tends to be progressive and the higher the taxation, the lower the level of inequality (ATKINSON, 2003; GOTTSCHALK and SMEEDING, 1997; GOUDSWAARD and CAMINADA, 2010). …

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