High taxes strangle Brazilian economy

Some suggest that a lack of education and infrastructure is responsible for Brazil's poor economic performance, but in a new book, "The Power of Productivity," economist William Lewis says it is primarily due to high levels of taxation on Brazilian workers and businesses.

The Brazilian government spends an amount equal to 39 percent of its gross domestic product.

This is significantly higher than the 8 percent level of the United States in 1913 when it was at the same level of development as Brazil.

Taxes have become so high that many businesses have been driven into the underground economy, where workers have far lower levels of productivity than the formal-sector. Today, half of all Brazilian workers are outside of the formal economy.

Lewis suggests this phenomenon has fuelled Brazil's persistently high poverty rates and slower economic growth:

The exodus of firms to the informal sector means legitimate firms end up bearing the brunt of the tax burden.

Today, Brazilian corporations pay 85 percent of all taxes collected, as compared with 41 percent for U.S. corporations.

As a result, formal-sector businesses no longer have a pricing advantage over informal businesses, which prevents a natural market correction towards higher productivity and higher standards of living.

High taxes deters small, informal businesses from growing and moving into the legal sector.

Source: Mary Anastasia O'Grady, Why Brazil's Underground Economy Grows and Grows, Wall Street Journal, September 10, 2004; and William Lewis, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability, University of Chicago Press, April 16, 2004.

For WSJ text (subscription required) http://online.wsj.com/article/0,,SB109476992207614117-search,00.html

For more on Behavioural Effects of Taxeshttp://www.ncpa.org/iss/tax/

FMF Policy Bulletin 21 September 2004