3. Tax burden by tax base

Assessing the tax burden by tax base intends to identify which economic categories underpin the tax wedge, thus being able to make some inferences about the characteristics of the tax system studied such as fairness and distributive efficiency.

Figure 2. Composition of the tax burden by tax base, 2016.

Breaking down the municipal tax burden, one can see that it is determined primarily by two taxes: the Tax on Services of any Nature (ISS) and the Property Tax (IPTU). While the first is an indirect tax, levied on the service sector's production, the second is a direct tax on urban real estate. Between 1980 and 2016, these two taxes accounted for, on average, more than 60% of the municipal tax burden. In 2016, this participation was 57.7%. Figure 1 shows the trajectory

Although both taxes present an expansionary trend from a historical perspective, this is most evident in the case of the ISS, especially from 2003 onwards. Some explanations may be suggested in this case: First, the modern economy is leaning increasingly towards the service sector, especially those services of higher added value, related to innovation and technology [19], and, in Brazil's case, especially in metropolitan areas [20]; second, the enactment of Amendment No. 116 in 2003, which increased the activities subject to the ISS; third, the advent of the electronic invoice in local governments, which modernised tax management and supervision [21] and consequently, the revenue collected [22, 23] and fourth, the relatively low IPTU

Assessing the tax burden by tax base intends to identify which economic categories underpin the tax wedge, thus being able to make some inferences about the characteristics of the tax

of the municipal tax burden and its main components since 1980.

Figure 1. Evolution of the municipal tax burden and its main components, 1980/2016.

collection in light of its potential [24–27].

system studied such as fairness and distributive efficiency.

3. Tax burden by tax base

250 Taxes and Taxation Trends

According to Afonso and Castro [3], the Brazilian tax burden (total) is markedly characterised by a high incidence of taxes on the sale of goods and services. In fact, the data from the 2016 tax burden point in this direction, as evidenced in Figure 2. However, the picture is significantly different when the municipal taxation is examined separately.

Despite the taxation on goods and services being pretty close in both cases, the way in which the taxes are levied (direct and indirect) acts slightly differently in the two cases. Adding the base of goods and services to taxation on foreign trade, financial fees and transactions (plus "others"), makes up the framework of indirect taxation in the country—which is usually regressive [28, 29], helping to accentuate social inequalities.

The burden of indirect taxation […] is high in Brazil. The so-called indirect taxes, included in the prices of goods and services are collected by third parties, responsible for charging, but effectively borne by final consumers. Such taxes, by their nature, affect consumers indiscriminately, regardless of their level of income. Therefore, mainly the poorest, who spend their entire income on consumption, are encumbered. The ultimate effect of this taxation is highly regressive and concentrating [30], p. 85.<sup>2</sup>

As Figure 3 shows, this indirect base has greater importance in the municipal taxation (50.6%) than in the consolidated public sector taxation (45.7%), which could indicate a worse tax structure in the municipal scope.

<sup>2</sup> Translation made by the authors.

profile of the localities is changed, allowing questions such as: "do bigger cities have a higher tax burden?" or "what is the profile of a municipality that receives relatively more transfers?"

Local Governments' Tax Burden in Brazil: Evolution and Characteristics

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Due to the information that is presented in this section being in greater detail, it has not been possible to present data as recent (2016) as that of the two previous sections. Since the last GDP for municipalities released by the IBGE refers to 2014, this section is related to 2014. Therefore, the main base of information (Finbra) was also from that year. This on the other hand was reedited to remove major errors such as zero or negative values, but providing a final sample of 4866 municipalities—87.4% of the total number of municipalities in Brazil (5570) in 2014. To calculate the burden, the municipalities were divided into six bands of populations<sup>4</sup> and five

Given these brief methodological considerations, Figure 4 presents the municipal tax burden (% of GDP) in terms of direct taxation and available revenue in each of the six population

Figure 4 presents two clear movements when the data are observed from the smaller to the higher population range: first, the local governments' own direct collection grows in relation to the size of the municipality in terms of population and second, the available

Figure 4. Direct collection and available municipal revenue by band of population, 2014.

The population bands are as follows: up to 10,000 inhabitants; from 10,000 to 20,000 inhabitants; from 20,000 to 50,000 inhabitants; from 50,000 to 100,000 inhabitants; from 100,000 to 500,000 inhabitants and 500,000 inhabitants and above.

The regions are according to the national geographic division: North, Northeast, Southeast, South and Central West.

to be asked.

regions.<sup>5</sup>

4

5

bands and the general average.

Figure 3. Tax burden of the consolidated public sector and local governments by type of taxation, 2016.

However, classifying taxes by how they are levied is not enough to make such an assertion. This is because, even among direct taxes, there is evidence of low levels of progressiveness or even regressiveness. For example, Carvalho Jr. [31] is categorical in stating that IPTU—despite being a direct asset tax—is regressive, within the realm of real contributors (taxpayers). Another case is that of the social security contribution (tax base "salary and labour") which, "[…] by virtue of the upper limit of contribution, acts regressively" [32], p. 13.<sup>3</sup> In the same sense, Mélo and Campos [33] point to a historical process of deterioration in progressiveness of taxation on income and patrimony.

In this way, considering indirect taxation's greater weight in the tax authorities of local governments, along with the fact that IPTU (the second largest municipal tax) also presents regressive characteristics, it is reasonable to assume that the municipal taxation contributes to accentuating social inequality in Brazil, following a characteristic which is inherent in the Brazilian tax system as a whole [9].
