Brazilian economy has not been through a good time since 2014. In 2015, president Dilma Roussef presented a possible solution to reduce public debt deficit: reintroduce “temporary” financial transaction tax (CPMF, in Portuguese). Of course, this generated broad discussion all over the country. This tax charges all financial transactions. For instance, if a citizen or a company pays anyone using its bank account (even if it is other tax payment), it must be charged by CPMF. However, CPMF does not apply in wage payments or transfers to the same ownership accounts.
For the government, this is a way to generate resources to improve the economy by reducing public deficit. Although, not everyone sees this decision as a good one. In the past, when government adopted CPMF, tax revenue had a significant value and helped in different areas, where public health expenses were the main one. However, at the time CPMF was created (1997), the tax objective was to finance public health only.
A recent research shows that population have not seen an improvement in public health during this period. Furthermore, CPMF is a temporary tax. Then, it should not last ten years. These are some reasons that explains why Brazilian citizens are afraid with CPMF coming back.
It is known that the adoption of a new tax should change the financial and goods market equilibrium. Therefore, there is a concern in the market not only about the destination of tax revenues, but also on how CPMF will impact Brazilian economy. When a government charge taxes on goods or services, demand is expected to fall as a reaction to prices increase. How much does this fall depend on demand elasticity? A paper from Brazil Treasury Department highlights that CPMF incidence is reflected in a high elastic demand, which implies that it deadweight losses will be much higher in comparison to tax revenues growth.
To companies, CPMF has a relevant impact. Their production costs should increase and the market is retracted already. So, this can lead to a fall in sales. Actually, consumers will face an increase in price of goods in the market. Moreover, they will prefer to pay in cash to avoid CPMF, instead of paying by easy electronic methods.
There are discussions among economist too. In one hand, they think that CPMF is a good tax, because of its extensive incidence (everyone who transfers any money has to pay), its instantaneous increase in tax revenues flow (tax is due at the same transaction day) and its evasion barrier (all transactions are reported to Brazil’s Central Bank). In the other hand, economists say that CPMF will charge part of population that have lower income and it will also reduce economy dynamism, since people will avoid to (explicit) get in too many financial transactions .
Even though this tax could be a partial solution to some difficulties in Brazilian economy, it’s very important to highlight an economists and citizens common view: do not apply the return of CPMF without taking a cut in public expenses in order to reduce public deficit.