Texto para discussão 13: How should brazil tax capital income

Abstract

This paper visits the Brazilian capital income taxation to know whether and to what extent it is neutral to domestic investment decisions. The analysis was guided to help Brazilian authorities in the achievement of capital tax neutrality and improvement of the tax system efficiency. Based on the King-Fullerton methodology for computation of effective tax rates, this paper develops a framework to derive the pre-tax and post-tax rates of return on investment, the tax wedges and the correspondent effective tax rates in Brazil. This is to verify how the Brazilian tax system responds to different sources of finance, namely debt, retained earnings and new equity, and also to investment in three types of assets: machinery, buildings and inventories. Simulations have shown an unbalanced tax system: debt is the best fund option, inventories the worst choice for assets and the interest on net equity has small effect on improving tax neutrality.