Balancing wealth and poverty through tax reform in Brazil

Tax Reform in Brazil: Will Proposed Changes Help or Hurt the Poor?

Lena Voss in Politics & Policy September 2025 • 5 min read.

"A deep dive into the potential impacts of Brazil's indirect tax reforms on poverty and inequality, analyzing different proposals and their real-world implications."

Brazil is on the cusp of a major shift in its tax system. After decades of discussion, a constitutional amendment (EC 132/2023) has been enacted, stemming from Proposed Amendment 45/2019 (PEC 45/2019). This reform aims to overhaul how consumption is taxed in the country, but will these changes truly benefit all Brazilians?

The current tax system is complex, relying heavily on indirect taxes – taxes applied to goods and services. The reform seeks to simplify this by consolidating five indirect taxes (ICMS, PIS, Cofins, IPI, and ISS) into a dual Value-Added Tax (VAT). This VAT would be split between the federal government (Contribuição sobre Bens e Serviços - IBS) and the states and municipalities (Imposto sobre Bens e Serviços - IBS). Additionally, a selective tax (IS) will be introduced on goods and services deemed harmful to health and the environment.

While the initial proposal envisioned a single VAT rate across most goods and services, the approved version incorporates multiple rates, exemptions, and special tax regimes. This raises critical questions about the reform's effectiveness in reducing inequality and its potential impact on the most vulnerable populations.

Understanding the Proposed Tax Structures

Balancing wealth and poverty through tax reform in Brazil

The original PEC 45/2019 aimed for a unified VAT rate, excluding products with negative externalities like alcohol and tobacco. To mitigate potential regressivity (where the tax burden falls more heavily on lower-income individuals), a "cashback" system was proposed to refund taxes to low-income families.

However, the approved version of PEC 45 includes differentiated regimes with exemptions and reduced rates. There are specific taxation methods, where the tax collection form may differ from the standard VAT model, and the rate may or may not be reduced. This caters to various organized groups. In total, 29 items or categories of goods and services are listed under these special regimes.

Reform 1: A uniform VAT rate of 25.8% applied to all goods and services without exception.
Reform 2: A standard VAT rate of 26.7% on all goods and services, excluding tobacco and alcoholic beverages. This includes a selective tax on tobacco and alcoholic beverages, with the rate set at twice the standard VAT. It also incorporates a cashback system, refunding the total tax on goods and services (excluding tobacco and alcohol) to households with a total household expenditure below R$420 per capita per month.
Reform 3: Aims to align with the EC 132/2023 structure. This sets a zero rate for essential food items and a standard VAT rate of 33.2%. Additionally, there's a 40% reduced rate for education, healthcare, medicine, public transportation, artistic productions, cultural events, and sports. A 70% reduced rate applies to services provided by independent professionals, and maintains the existing tax rate for financial services and health plans.
Reform 4: Replicates Reform 3, but taxes the essential food basket at the standard rate. It uses the additional revenue to fund a fixed monetary transfer to all individuals in the population.

It's important to note that the exact items subject to exemptions, reduced rates, and the selective tax are still under discussion in the National Congress. This uncertainty makes it difficult to accurately assess the distributional effects of the approved tax reform and the standard rate needed to maintain current revenue levels. However, simulations of alternative rate structures can shed light on these issues.

The Path Forward: Ensuring a Fair Tax System

Brazil's proposed tax reforms have the potential to reshape the country's economic landscape. However, careful consideration must be given to the distributional effects of these changes, particularly on low-income families. By understanding the potential impacts of different tax structures and incorporating measures to mitigate regressivity, Brazil can create a tax system that promotes both economic growth and social equity.

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Everything You Need To Know

What is the main goal of the tax reform (EC 132/2023) in Brazil, and which specific taxes are being consolidated?

The main goal of the tax reform (EC 132/2023) in Brazil is to overhaul the consumption tax system by simplifying it. The reform consolidates five indirect taxes: ICMS, PIS, Cofins, IPI, and ISS into a dual Value-Added Tax (VAT). This VAT is split between the federal government (Contribuição sobre Bens e Serviços - IBS) and the states and municipalities (Imposto sobre Bens e Serviços - IBS). Additionally, a selective tax (IS) will be introduced on goods and services deemed harmful to health and the environment.

How does the approved version of PEC 45/2019 differ from the original proposal, and what implications does this have for inequality?

The original PEC 45/2019 aimed for a unified VAT rate across all goods and services, except those with negative externalities. To address potential regressivity, it proposed a 'cashback' system for low-income families. However, the approved version includes differentiated regimes with exemptions and reduced rates for specific items and sectors. This deviation from a uniform rate introduces complexities and raises concerns about the reform's effectiveness in reducing inequality, as special regimes may benefit certain groups disproportionately.

Can you explain the key differences between Reform 2 and Reform 4 in the context of the proposed tax changes in Brazil, particularly focusing on their approaches to essential food items and revenue distribution?

Reform 2 proposes a standard VAT rate of 26.7% on all goods and services, excluding tobacco and alcoholic beverages, which are subject to a selective tax at twice the standard VAT rate. It includes a cashback system, refunding the total tax on goods and services (excluding tobacco and alcohol) to households with a total household expenditure below R$420 per capita per month. Reform 4 replicates Reform 3, but taxes the essential food basket at the standard rate. It uses the additional revenue to fund a fixed monetary transfer to all individuals in the population. The key difference lies in how essential food items are treated and how the revenue generated is redistributed. Reform 2 exempts nothing but refunds to the poor; reform 4 taxes all food and gives a fixed sum to all people.

What is the 'selective tax' (IS) within the Brazilian tax reform, and what is its purpose?

The 'selective tax' (IS) is a tax that will be introduced on goods and services deemed harmful to health and the environment as part of the Brazilian tax reform. Its purpose is to discourage the consumption of these goods and services by increasing their cost, thereby promoting healthier and more environmentally sustainable choices. While the specific items subject to the IS are still under discussion in the National Congress, it represents a targeted approach to addressing negative externalities through taxation.

What are the potential implications of the exemptions and reduced rates included in the approved version of PEC 45 for different sectors and income groups in Brazil?

The exemptions and reduced rates included in the approved version of PEC 45 have significant implications for different sectors and income groups. Specific sectors benefiting from reduced rates, such as education, healthcare, and public transportation, may experience increased competitiveness and potentially lower prices for consumers. However, these exemptions and reduced rates can also complicate the tax system and create opportunities for lobbying and rent-seeking. For income groups, the distributional effects depend on which goods and services receive preferential treatment and how these changes affect the overall tax burden on different households. Without careful consideration, these differentiated rates could disproportionately benefit wealthier households or specific industries, exacerbating inequality.