Can a Flat Tax and Basic Income Really Work in Brazil? Here’s the Model..

Brazil, a nation renowned for its vibrant culture and vast natural resources, also grapples with profound socio-economic disparities. Persistent challenges like income inequality and complex tax structures have long fueled debates about radical economic reforms. Among the most discussed concepts globally, a Universal Basic Income (UBI) paired with a simplified flat tax system emerges as a tantalizing prospect for achieving both social equity and fiscal efficiency.

But could such a transformative model genuinely function within the intricate economic landscape of Brazil? What would be the real-world implications, the winners and losers, and the budgetary demands? To answer these crucial questions, researchers have meticulously modeled several hypothetical UBI schemes, offering a data-driven glimpse into what might be possible. Their work provides a vital framework for understanding the potential of such an ambitious undertaking.

Decoding the Research: Models and Methodology

To fully grasp the methodology behind these proposals and the intricate details of their design, let’s delve into the researchers’ own description of their models and analytical approach:

Table of Links
Abstract and 1. Introduction
UBI schemes analysed and method

Fiscal effects

Distributional effects
4.1. Poverty and inequality indicators
4.2. Distributional effects in terms of winners and losers

Conclusion and References

2. UBI schemes analysed and method
As mentioned above, three hypothetical UBI schemes have been simulated. The first scheme considered (Scheme 1) combines a uniform payment of a basic income to every individual in society with a flat rate income tax on all other incomes, from the first real. Such a system, usually referred to in the literature as ‘basic income/flat tax proposal’ (see, for instance, Atkinson 1995), is equivalent in terms of distributional impact to the Negative Income Tax (NIT) proposed by Milton Friedman (1962).^[7]
In our simulations, existing (contributory and non-contributory) pension benefits are reduced by the amount of the basic income and all other cash benefits are totally replaced by the basic income. On the revenue side of the budget, the current personal income tax and employee social security contributions are abolished. The rate of the new income tax is calculated to ensure that the reform is ‘budget neutral’, in the sense that increases in net spending are matched by increases in (net) tax revenue, so that the budget deficit is not exacerbated.
Some advocates of UBI believe that the benefit level should be set at an amount large enough to ensure a basic level of income security for everyone, including those without any other source of income. The national poverty line and the median income are often taken as references. In our simulations, the UBI is set at the level of the poverty line suggested by the World Bank for upper-middle-income countries, which is US$5.50 a day. This was equivalent to 51% of the Brazilian per capita median disposable income in 2017 (our reference year).^[8]
The second scheme simulated differs from Scheme 1 in that the level of the basic income varies according to the age of the recipient: a standard amount equal to the poverty line is paid to working age adults (18 – 64 years), half this amount is the basic income paid to children (under 18 years), and double the standard amount is paid to elderly people (65 and over).^[9]The basic idea here is to enhance fiscal and political feasibility with respect to Scheme 1, as under Scheme 2 the net cost of UBI is expected to be lower, particularly to pensioners. By its turn, the third scheme considered differs from Scheme 2 in that, the income tax has a lower marginal rate on incomes below a certain threshold. This lower rate is set at 20% and it is applied on income levels that are lower than twice the median per capita household gross income.^[10]
All simulations are performed using a static tax-benefit microsimulation model, BRAHMS (Brazilian Household Microsimulation System), specially built to incorporate key features of the Brazilian tax-benefit system.^[11] A microsimulation model is a computational programme that calculates tax paid and transfers received by individuals/households in a nationally representative sample of the population. The model takes into account the interaction among the different policy instruments built into the tax-benefit system, and it is thus particularly suitable to evaluating the distributional and budgetary impact of tax and benefit reforms. The particular version of the microsimulation model used in this study is based on the household survey Pesquisa Nacional por Amostra de Domicílios Contínua (PNADC) for the year 2017, carried out by the Brazilian Institute of Geography and Statistics.^[12] As the model is static, the simulations only estimate first-round effects and do not consider behavioural responses.^[13]
The basic microsimulation outcome we are concerned with is the disposable income of each household under the existing tax-transfer system and under each UBI reform. Changes in disposable income at the household level determine the distributional effects of the reform and, on the aggregate, they explain the impact on fiscal variables.

Authors:
(1) Rozane Bezerra de Siqueira, Department of Economics, Centro de Ciências Sociais Aplicadas, Universidade Federal de Pernambuco, Av. dos Economistas s/n, Recife-PE, CEP 50740-580 (rozane_siqueira@yahoo.com.br);
(2) José Ricardo Bezerra Nogueira, Department of Economics, Centro de Ciências Sociais Aplicadas, Universidade Federal de Pernambuco, Av. dos Economistas s/n, Recife-PE, CEP 50740-580 (jrbnogueira@yahoo.com.br).

This paper is available on arxiv under CC BY 4.0 DEED license.

[7] The two schemes differ in the way they are implemented. Under the NIT most individuals receive part or the whole of the basic income grant in the form of tax exemptions.

[8] In 2017, this poverty line corresponded to R$406 per month, equivalent to 43% of the legal minimum wage, as well as of the basic pension paid by the Brazilian social security system in the same year.

[9] In 2017, 65 was the standard statutory retirement age for males in Brazil (although some regimes permitted retirement much earlier).

[10] In 2017, the monthly median per capita household gross income was R$850.

Navigating the Potential: Fiscal and Social Impacts

The described models highlight the fundamental trade-offs and design choices inherent in implementing a UBI and flat tax. Scheme 1, the straightforward UBI with a flat tax, aims for budget neutrality by replacing existing benefits and abolishing current income tax and social security contributions. The UBI’s level, set at the World Bank poverty line (US$5.50/day or R$406/month in 2017), suggests a significant boost for the poorest, potentially lifting millions out of extreme poverty. However, it also implies a reduction in pension benefits for many, which could face political resistance.

Scheme 2 introduces age differentiation, paying less to children and more to the elderly. This design acknowledges the varying needs and political sensitivities across different demographics, aiming for greater fiscal and political viability. By targeting benefits more specifically, the overall net cost of UBI might be lower, making it a more palatable option for policymakers concerned about the financial burden.

Scheme 3 further refines the tax structure by introducing a lower marginal tax rate (20%) for incomes below a certain threshold (twice the median per capita household gross income, which was R$850 in 2017). This move towards a more progressive tax structure within the flat tax framework could mitigate some of the regressive aspects typically associated with purely flat taxes, ensuring that lower and middle-income earners face a less onerous tax burden on their initial earnings. This nuanced approach could offer a more equitable balance between simplicity and social protection.

While the models are static and don’t account for behavioral responses (like changes in labor supply), they provide crucial first-round estimates of disposable income changes. These changes are key to understanding the potential for poverty reduction, alterations in inequality, and the identification of distinct groups of “winners” and “losers” under each scenario. The rigorous use of the BRAHMS microsimulation system, based on 2017 data, grounds these theoretical explorations in Brazil’s actual socio-economic fabric, offering valuable insights for future policy discussions.

Real-World Relevance and Steps Forward

Consider a real-world (hypothetical) example based on these models. In 2017, a Brazilian family of four (two adults, two children) living below the poverty line, with no other income, would receive around R$1,218 per month under Scheme 2 (R$406 for each adult, R$203 for each child). This payment, while modest, could provide a crucial safety net, ensuring basic food, shelter, and access to necessities, drastically improving their living conditions compared to no income at all. It illustrates how a UBI, even at poverty-line levels, could serve as a foundational income security measure.

Actionable Steps for Progress:

• Foster Public Discourse: Encourage widespread public debate and educational campaigns about the implications of UBI and flat tax models. Understanding the nuances, benefits, and potential drawbacks is essential for public acceptance and political will.
• Support Further Research: Invest in dynamic microsimulation models that can incorporate behavioral responses (e.g., changes in work effort, entrepreneurship) to provide a more complete picture of the long-term economic effects.
• Pilot Programs: Consider implementing small-scale, localized UBI pilot programs in selected Brazilian municipalities. These real-world trials can offer invaluable empirical data on the actual impact on poverty, health, education, and local economies, informing national policy design.

Conclusion

The question of whether a flat tax and basic income can truly work in Brazil is complex, but the rigorous modeling by researchers like Siqueira and Nogueira offers a compelling starting point. Their work demonstrates that budget-neutral and age-differentiated UBI schemes, potentially combined with progressive tax elements, are not just theoretical constructs but quantifiable possibilities. While the immediate fiscal and distributional impacts are significant, the long-term societal benefits of reduced poverty and simplified tax systems could be transformative.

Moving forward, sustained research, informed public dialogue, and perhaps cautious pilot initiatives will be crucial to understand the full potential and navigate the challenges of implementing such a bold economic reform in Brazil. The models provide a blueprint; the next steps require careful consideration and courageous policy decisions.

Explore More Research on UBI in Brazil

A: The main proposal revolves around implementing a Universal Basic Income (UBI) alongside a simplified flat tax system, aiming to address socio-economic disparities and improve fiscal efficiency in Brazil.

A: The researchers modeled three schemes: Scheme 1 (uniform UBI with a flat tax), Scheme 2 (age-differentiated UBI with a flat tax), and Scheme 3 (age-differentiated UBI with a flat tax that includes a lower marginal rate for lower incomes).

A: In the simulations, the UBI is set at the World Bank’s poverty line for upper-middle-income countries, which was US$5.50 a day (equivalent to R$406 per month in Brazil in 2017).

A: BRAHMS (Brazilian Household Microsimulation System) is a computational model used to calculate taxes paid and transfers received by individuals/households in Brazil. It’s suitable for evaluating the distributional and budgetary impact of reforms. Its main limitation is that it’s a static model, meaning it only estimates first-round effects and does not account for behavioral responses (e.g., changes in work effort).

A: Recommended steps include fostering public discourse, supporting further dynamic microsimulation research to account for behavioral responses, and implementing small-scale, localized UBI pilot programs to gather real-world data.