Treasury is studying ways to exempt IRPF up to R$5,000 and estimates an impact of R$35 billion
One of the main campaign promises made by the president Luiz Inácio Lula da Silva (PT) In the 2022 elections, the increase in the Personal Income Tax (IRPF) exemption range for monthly income of up to R$5,000 during the current term has generated debate within the federal government’s economic team.
From the beginning, the measure was considered audacious by several political actors, due to the high volume of revenue waivers generated, and was an object of skepticism even among Lula’s closest allies in the National Congress.
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But the president’s insistence on the agenda, with the renewal of the commitment in successive opportunities in interviews and speeches (in October, Lula even talked about taking the exemption beyond R$5,000), led technicians to study ways to make it economically viable before the next dispute over the Palácio do Planalto, in 2026. The idea is to seek a design with as little fiscal noise as possible and avoid being tied to a strictly political conduct of the agenda.
In the financial market, calculations were circulating that, depending on the format of the rule, the fiscal impact could reach R$100 billion ─ which would require a robust package of compensation measures. A concern among agents, in fact, would be the risk of such a waiver not being covered by new initiatives, as solutions could be created to “circumvent” the requirements of the Fiscal Responsibility Law (LRF).
According to a source from the government’s economic team with knowledge of the matter, however, the impact on public accounts is expected to be much smaller, amounting to between R$35 billion and R$40 billion. The number may vary significantly, depending on the final design, which should be finalized next year.
“There are two very clear messages that we send and we always reiterate. The first is that we are studying the fiscal impact of the R$5,000 and ways to mitigate it. And, second, we are studying compensation measures so that the measure, as a whole, is neutral for revenue purposes,” said the source.
“We do not, in any way, want to generate any fiscal imbalance as a result of this measure”, he stressed, on condition of anonymity.
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According to her, the “more mature” idea of the proposal is to generate as much focus as possible on taxpayers with a monthly income of up to R$5,000 ─ which would reduce the burden on public accounts.
Furthermore, a kind of “exit ramp” would be created, with the partial extension of the benefit to those who are slightly above this range.
The movement represents an important change in relation to the current logic of the IRPF. This is because Income Tax is progressive, with the taxpayer not paying the tax corresponding to income up to the exemption band, and paying the respective percentage on the amount that exceeds the limit of each band. Currently, there are 5 groups of rates, ranging from 0% (up to R$2,259.20) to 27.5% (over R$4,664.68).
If the increase in the exemption range was associated with the commitment to extend benefits across the entire chain of taxpayers, the fiscal impact would approach the R$100 billion estimated by financial market economists. “The fiscal impact would greatly increase,” noted the source. “So, we are building something more focused on R$5,000.”
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But the move to limit tax impacts would create a problem for those who earn little more than the new exemption limit ─ for example, R$5,100, R$6,000 or even R$7,000. This is because they would enter the first tax bracket on all income, without any discount. This could imply net gains below the exemption range, generating a distortion.
“We are trying to look at this citizen to have some positive impact for him too”, explained the source.
Weeks ago, discussions gained momentum in the government about measures to compensate for the IRPF exemption of up to R$5,000. The debate attracted the attention of the financial market, but the economic team has mobilized efforts to bring forward conversations about reviewing expenses and worked to leave the IR benefit for another time.
The argument is that the hammer on formatting the final design of the promised benefit has not yet been struck by Lula. In September, the Minister of Finance, Fernando Haddad (PT), said that the scenarios had already been presented, but that at least one of them was considered “promising”, both from an economic and political point of view.
For the economic team, it is essential to convince that a robust fiscal agenda can open structural paths to fulfill the promise without distancing the government from the objective of recovering investment grade. The ideal, in the case of Income Tax, for this wing, would be for the movement to occur gradually, so as to leave the more severe impact on public accounts in the future.
