Income Tax Deductions: OECD recommends lowering limits

The Organization for Economic Cooperation and Development (OECD), known as the “rich country club”, recommended that the government reduce deductions related to health and education in Income Tax. The objective is to reduce tax gaps and increase progressiveness in income taxation. The suggestion was made clear this Thursday (2), in the release of new forecasts for the world economy.

Today, the taxpayer has the right to deduct, from the IR calculation base, all health expenses for himself and his dependents. Education expenses can also be deducted, but in this case there is a ceiling of R$3,561.50 per person. It is these deductions that the OECD recommends limiting.

The OECD recommendation comes amid the start of new discussions on tax reform in Congress. Proposals on income taxation are part of the next stage. Until now, only the complementary bill (PLC) which regulates future Tax on Goods and Services (IBS), Contribution on Goods and Services (CBS) and Selective Tax was sent to Congress.

The Minister of Finance, Fernando Haddad, had until March 20 to submit to the National Congress the bill proposing the reform of income taxation and payroll. However, the deadline was not met. One of the justifications he presented was the non-overlapping of Congress matters, with the aim of facilitating the processing of the PLC that regulates consumption taxation.

Another reason given by the minister for the failure to meet the deadline was the complexity of income taxation, which according to him will be dealt with in parts. “There is no problem with not sending part of the Income Tax reform within 90 days. We understand that we can send as the texts are formatted and discussed with society. There is no point in sending something that has not been discussed before. It’s bad for Congress,” he said in March.

The minister said he was sure that Congress would prefer to receive a better project weeks later than to receive something to be trimmed. “Instead of helping the country find a path, this gets in the way. In the recent past, several projects on this have been forwarded from one house to another.”

For the entity, Brazil needs to restore confidence in public accounts

The OECD’s recommendations regarding fiscal policy are not limited to reducing deductions for health and education, which would mainly affect the middle class. The entity makes other suggestions to restore confidence in Brazilian public accounts.

One of them is to achieve the primary result target (difference between what the government collects and what it spends, excluding interest expenses) and implement the new fiscal framework. For this year and next, the goal is zero results. Previously, the government expected a surplus of 0.5% of GDP in 2025, but ended up lowering the goal.

The market is not confident in meeting these targets. The midpoint of primary result projections in the Focus bulletin, published weekly by the Central Bank, projects a deficit of 0.7% of GDP this year and 0.68% in 2025.

The OECD’s assessment is that the new unified value-added tax system, presented in December and whose first part of the regulation was sent to Congress at the end of April, will reduce costs related to tax issues for companies. “It will contribute to greater confidence,” says the organization.

Another impact of the reform in consumption taxation, according to the entity, is the reduction in the cost of the consumption basket for the low-income population. The definition of items that will have a zero rate and reduced by 60% will be made by the National Congress, based on a proposal made by the Ministry of Finance.

The organization also suggests a broader reform of public accounts, which would help create more fiscal space and improve the sustainability of public debt, which in the 12 months ending in February corresponded to 75.5% of GDP, according to the Central Bank ( BC). A year earlier, public debt was 73% of GDP.

OECD also makes social and environmental recommendations

The OECD’s suggestions also cover other topics. One of them is the expansion of access to early childhood education, especially for low-income families and single mothers. “This can promote equal opportunities and facilitate greater female participation in the workforce”, he highlights.

The entity also proposes the reallocation of expenses related to the labor market. The subsidies granted could be allocated to a high-quality training policy aligned with new trends in the labor market. “This would improve the match between labor supply and demand”, says the text.

Greater opening of the Brazilian economy to the outside world is also advocated. The organization points out that access to foreign markets and deeper integration into global chains could be facilitated by reducing trade barriers. According to the OECD, import tariffs and non-tariff barriers, including widespread local content requirements, could be reduced further.

Addressing infrastructure gaps in transport, water and sanitation could help improve the competitiveness of Brazilian companies and access to basic services for a greater portion of the population.

“Stricter enforcement of environmental protection laws, including the Forest Code, will be crucial to combat deforestation. Linking subsidized agricultural credit to the use of low-carbon practices could help combat deforestation and reduce emissions”, indicates the OECD.

OECD raises GDP projection, but sees greater risks for the economy

The entity also revised upwards the growth projection for the Brazilian economy in 2024. It went from 1.8%, in November, to 1.9%. For next year, GDP is expected to increase by 2.1%. Domestic demand will be the main driver, according to the report.

For the OECD, household consumption should remain robust, supported by wage increases and stronger job creation. Another expectation is that investment will improve as financial conditions become more favorable and business confidence strengthens.

The assessment is that inflation should fall from 4.6% recorded in 2023 to 4% in 2024 and 3.3% in 2025. The expectation is that the rate of disinflation will slow down, with possible temporary increases, especially among food and beverages , which are more susceptible to climate.

The OECD also observes an increase in risks for the Brazilian economy. Geopolitical tensions and slower growth in China, an important trading partner, could affect exports. A worsening in the results of public accounts could increase pressure on inflation, further delaying reductions in interest rates, which would affect investment and consumption.

Positive expectations with a successful implementation of tax reform could increase confidence and stimulate economic activity, the organization believes.