The cost of Lula’s plan to raise income tax exemption threshold

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After confirming that he intends to increase Brazil’s minimum wage to BRL 1,320 (USD 256) as of May, President Luiz Inácio Lula da Silva said he also plans to increase the income tax exemption threshold by 39 percent to BRL 2,640 — that is, the equivalent of two minimum salaries.

Lula could make the change via an executive decree, which would have immediate effects, but the tax threshold update would need to be ratified by Congress.

The government has not yet clarified whether all income brackets will be updated. However, if all ranges are adjusted by the same rate (38.66 percent), the federal government would lose as much as BRL 108 billion in revenues in 2023 (BRL 130 billion in 12 months), according to the tax auditors association Unafisco.

A previous estimate by auditors’ union Sindifisco indicated BRL 41 billion in revenue losses in 2024. The difference being that Unafisco already considers the measure’s effects on this year.

Another calculation by brokerage firm XP — considering only the change to the exemption threshold — suggests a smaller drop in federal revenue of around BRL 16 billion a year, and BRL 10 billion in 2023 if the measure takes effect in May.

Raising the income tax threshold is an old demand from the population; it was a campaign promise for both Lula and former President Jair Bolsonaro. The brackets have not been shifted since 2015, eating up an increasing share of the income of those who earn less — hence the intention of Finance Minister Fernando Haddad to discuss a revenue-focused tax reform in the second half of this year.

During last year’s election campaign, Lula had promised to increase the tax exemption threshold to BRL 5,000. Now, however, he says he will approach that goal in yearly increments.

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