1. Introduction

Throughout the 1980s and 1990s, many countries experienced state reforms based on the privatisation of the state productive sector and decentralisation of social policies. The decentralisation was established by the World Bank as a strategy that would provide more efficiency in the provision of public services, besides subjecting them to greater social control of the population [1]. Thus, a description of these policies was adopted in countries of unitary and

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and eproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

federalist political organisation, but only in the Brazilian federation, the local government was elevated to the condition of federative entity.

procedures with regard to intergovernmental relations. It became the norm for tax-collecting efforts to be concentrated in unshared revenue, such as social contributions [11] and the transfer of responsibilities to other spheres of Government [12], which was backed by the Constitution of 1988 to establish obligations common to more than one level of Government.

Local Governments' Tax Burden in Brazil: Evolution and Characteristics

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247

Despite the municipalities gaining space in the Brazilian federation, several problems relating to the implementation of public policy and tax collection and administration at local level can still be observed. Regarding expenditure, one can highlight the institutional difficulties of inter-municipal cooperation (in the case of consortia) in the provision of public services [13], which is also hindered by the federation's horizontal inequalities [14], thereby generating inefficiency in public spending. Regarding revenue, tax management is still plagued by inefficiency, and municipal tax authorities have high administrative costs, especially in places with smaller populations and less economic weight which still rely heavily on federal and state

This study addresses this last question. Since the public sector's fiscal space is mostly determined by its tax revenue, it is necessary to analyse municipal taxation. As Ingram and Hong [15] categorically affirmed, the importance of studying municipal finances comes from the idea of cities and their surroundings as agents of economic growth, in which the efficient provision of public services can create the correct incentives for firms and households. The inadequate supply of infrastructure and urban services (such as public transportation) by local governments tends to lead to a loss in productivity, thereby weakening the local economy [16].

The importance of this analysis goes further: few studies have chosen to do an evaluation focused on this theme in Brazil. Broadly speaking, the vast majority of the work produced in Brazil on taxation is aimed at the federal level or the consolidated public sector. At the municipal level, it is common to read articles about taxation with more specific content based

Therefore, the aim of this study is to analyse the tax burden of local governments in Brazil, focusing on its historical evolution, participation in the federation, size, tax base and distribution of revenue between localities according to their size and region. It is important to note, however, that the tax burden here will be assessed in a broader sense, not just restricted to direct income (direct taxation), but also to tax revenue resulting from other spheres of government destined for municipalities—that is, the available revenue. To achieve this objective, a descriptive analysis of data—always obtained from official sources—will be carried out,

In addition to this introduction, five more sections are presented: Section 2 presents the evolution of municipal taxes, relating it to the trajectory of the total tax burden; Section 3 examines how municipal taxation impacts on the economy, once more, in contrast to the consolidated public sector's tax base; Section 4 presents data broken down by population and region; therefore, attempting to understand how taxation behaves according to the size and location of municipalities; Section 5 presents a brief international comparison of the size of local governments in fiscal federalism and finally, Section 6 presents final considerations on

exclusively on one tax or even in the form of case studies.

supported by bibliographic references related to the topic.

transfers [5].

the topic.

The institution of federalism in three spheres of government (Union, 26 states and the federal district and 5570 municipalities) gives everyone a broad political, administrative, legislative and financial autonomy. It is a symmetrical federalism that does not recognise its economic disparities or an unequal distribution of the population in the national territory: 70% of the municipalities aggregate only 17.1% of the Brazilian population, which is very concentrated in large cities (29.3% of the population lives in 38 municipalities with more than 500,000 inhabitants). But, almost half of the municipal tax collection is also concentrated in these municipalities [2].

Such inequality would translate into different financial autonomies between municipalities: the larger ones have more capacity to raise own revenue, but a large majority of small municipalities depend on revenues from intergovernmental transfers. Recognising territorial disparities in such a context raises major challenges for the federative cooperation in Brazil. It is about going far beyond what this chapter proposes.

Usually, in most federalist countries, the local governments have the smallest budget among the different levels of government. As this level of government is more fragmented and meets the needs of targeted segments of the population through less complex public policies, there is a natural tendency for the resources available in local governments to be lower than those of state/regional governments and the central government.

In Brazil, this scenario is no different, but there is an important aspect to be highlighted: the regular and increasing participation of the municipalities in the consolidated public sector's available income. In 2014, the municipalities directly collected about 7% of the country's tax burden and ended up with just under 20% of this amount after intergovernmental transfers [3]. In 1987, a year before the enactment of the Federal Constitution, these shares were 2.5 and 12.6%, respectively [4]. The growth trend is so consistent that nowadays the municipalities have a budget almost as important as that of the state governments, a fact that has led some authors, for example, Afonso and Araujo [5], Castro and Afonso [6] and Fernandes and Wilson [7], to classify the fiscal federalism in Brazil as a "fiscal municipalism" or "municipal federalism."

If much of this growth was due to the increase in intergovernmental transfers, the local governments' greater capacity to levy taxes was no less important. According to Serra and Afonso [8], the subnational governments' ability to levy their own taxes strengthened and consolidated from the establishment of the Constitution of 1988 and did so concomitant with the expansion of the country's total tax burden [9]. That is, the municipal participation in this burden expanded precisely at a time in which the Brazilian welfare state grew after the current constitution advanced social rights.

If the flow of resources has increased, the allocation of public policies has also been growing at an accelerated pace. During the 1990s, when faced with the new reality of reduced participation in available revenue resulting from decentralisation, coupled with the need for fiscal adjustment and macroeconomic stabilisation [10], the Union began to follow unorthodox procedures with regard to intergovernmental relations. It became the norm for tax-collecting efforts to be concentrated in unshared revenue, such as social contributions [11] and the transfer of responsibilities to other spheres of Government [12], which was backed by the Constitution of 1988 to establish obligations common to more than one level of Government.

federalist political organisation, but only in the Brazilian federation, the local government was

The institution of federalism in three spheres of government (Union, 26 states and the federal district and 5570 municipalities) gives everyone a broad political, administrative, legislative and financial autonomy. It is a symmetrical federalism that does not recognise its economic disparities or an unequal distribution of the population in the national territory: 70% of the municipalities aggregate only 17.1% of the Brazilian population, which is very concentrated in large cities (29.3% of the population lives in 38 municipalities with more than 500,000 inhabitants). But, almost half of the municipal tax collection is also concentrated in these municipal-

Such inequality would translate into different financial autonomies between municipalities: the larger ones have more capacity to raise own revenue, but a large majority of small municipalities depend on revenues from intergovernmental transfers. Recognising territorial disparities in such a context raises major challenges for the federative cooperation in Brazil. It

Usually, in most federalist countries, the local governments have the smallest budget among the different levels of government. As this level of government is more fragmented and meets the needs of targeted segments of the population through less complex public policies, there is a natural tendency for the resources available in local governments to be lower than those of

In Brazil, this scenario is no different, but there is an important aspect to be highlighted: the regular and increasing participation of the municipalities in the consolidated public sector's available income. In 2014, the municipalities directly collected about 7% of the country's tax burden and ended up with just under 20% of this amount after intergovernmental transfers [3]. In 1987, a year before the enactment of the Federal Constitution, these shares were 2.5 and 12.6%, respectively [4]. The growth trend is so consistent that nowadays the municipalities have a budget almost as important as that of the state governments, a fact that has led some authors, for example, Afonso and Araujo [5], Castro and Afonso [6] and Fernandes and Wilson [7], to classify the fiscal federalism in Brazil as a "fiscal municipalism" or "municipal

If much of this growth was due to the increase in intergovernmental transfers, the local governments' greater capacity to levy taxes was no less important. According to Serra and Afonso [8], the subnational governments' ability to levy their own taxes strengthened and consolidated from the establishment of the Constitution of 1988 and did so concomitant with the expansion of the country's total tax burden [9]. That is, the municipal participation in this burden expanded precisely at a time in which the Brazilian welfare state grew after the current

If the flow of resources has increased, the allocation of public policies has also been growing at an accelerated pace. During the 1990s, when faced with the new reality of reduced participation in available revenue resulting from decentralisation, coupled with the need for fiscal adjustment and macroeconomic stabilisation [10], the Union began to follow unorthodox

elevated to the condition of federative entity.

is about going far beyond what this chapter proposes.

state/regional governments and the central government.

ities [2].

246 Taxes and Taxation Trends

federalism."

constitution advanced social rights.

Despite the municipalities gaining space in the Brazilian federation, several problems relating to the implementation of public policy and tax collection and administration at local level can still be observed. Regarding expenditure, one can highlight the institutional difficulties of inter-municipal cooperation (in the case of consortia) in the provision of public services [13], which is also hindered by the federation's horizontal inequalities [14], thereby generating inefficiency in public spending. Regarding revenue, tax management is still plagued by inefficiency, and municipal tax authorities have high administrative costs, especially in places with smaller populations and less economic weight which still rely heavily on federal and state transfers [5].

This study addresses this last question. Since the public sector's fiscal space is mostly determined by its tax revenue, it is necessary to analyse municipal taxation. As Ingram and Hong [15] categorically affirmed, the importance of studying municipal finances comes from the idea of cities and their surroundings as agents of economic growth, in which the efficient provision of public services can create the correct incentives for firms and households. The inadequate supply of infrastructure and urban services (such as public transportation) by local governments tends to lead to a loss in productivity, thereby weakening the local economy [16].

The importance of this analysis goes further: few studies have chosen to do an evaluation focused on this theme in Brazil. Broadly speaking, the vast majority of the work produced in Brazil on taxation is aimed at the federal level or the consolidated public sector. At the municipal level, it is common to read articles about taxation with more specific content based exclusively on one tax or even in the form of case studies.

Therefore, the aim of this study is to analyse the tax burden of local governments in Brazil, focusing on its historical evolution, participation in the federation, size, tax base and distribution of revenue between localities according to their size and region. It is important to note, however, that the tax burden here will be assessed in a broader sense, not just restricted to direct income (direct taxation), but also to tax revenue resulting from other spheres of government destined for municipalities—that is, the available revenue. To achieve this objective, a descriptive analysis of data—always obtained from official sources—will be carried out, supported by bibliographic references related to the topic.

In addition to this introduction, five more sections are presented: Section 2 presents the evolution of municipal taxes, relating it to the trajectory of the total tax burden; Section 3 examines how municipal taxation impacts on the economy, once more, in contrast to the consolidated public sector's tax base; Section 4 presents data broken down by population and region; therefore, attempting to understand how taxation behaves according to the size and location of municipalities; Section 5 presents a brief international comparison of the size of local governments in fiscal federalism and finally, Section 6 presents final considerations on the topic.
