Experts Slam Tax Reform's Privilege Loopholes for Rich Services, Professionals

Brazil's proposed tax reform is drawing fire from economists who see it as a masterclass in how the wealthy capture policy. The measure, set for a Senate committee vote in early November, would simplify the country's notoriously complex tax system—a goal nearly all experts support. But embedded in the proposal are a series of carve-outs that, critics argue, reveal the machinery of privilege at work.

The most glaring example involves education and healthcare. Under the reform, these services would pay only 40 percent of the standard consumption tax rate. On its surface, this sounds protective: who wants to burden schools and hospitals? But Maílson da Nóbrega, a former finance minister and economist at the Tendências consulting firm, sees it differently. The families sending children to elite private schools, using premium hospitals, and taking vacations at luxury resorts are not poor. They are the country's richest households. Meanwhile, a poor family pays the full tax rate on nearly everything they buy, except basic food. The math is stark: if the standard rate is 25 percent, the wealthy pay 10 percent for education and health. Everyone else pays 25 percent for everything else. "This is unacceptable from a social perspective," da Nóbrega said.

The distortions ripple outward. When companies face lower tax rates in certain sectors, they have an incentive to reorganize themselves to fit those categories—even if doing so means adopting less efficient technologies. That inefficiency compounds across the economy, da Nóbrega argues, dragging down growth. The reform also creates what he calls "islands of privilege" for regulated professions. Lawyers, doctors, engineers, and economists who operate outside the simplified tax regime would pay only 70 percent of the standard rate. This affects a small number of people—mostly high earners—yet worsens inequality. Eduardo Fleury, an economist and World Bank consultant, called the arrangement "inexplicable" and "inacceptable."

The arguments used to justify these breaks, da Nóbrega contends, rest on shaky ground. Supporters claimed the reform would raise education costs, so a tax cut was necessary. True, costs will rise—but only for the wealthy, who can absorb them. The poor already struggle to afford private school; they use public systems. "The public bought this idea," da Nóbrega said, "but it's not well-founded." The same logic applies to basic sanitation. Yes, costs will increase. But a better approach would have been to phase in the higher tax rate gradually over ten years, rather than hand out permanent discounts.

International experience suggests a cleaner path: a single tax rate with no exceptions. If a sector truly deserves special treatment—the financial system, construction, tourism—it should receive a direct subsidy, not a tax break. Fleury advocates for a different tool altogether: cashback mechanisms that return taxes to poor families without creating loopholes. The current proposal includes this for electricity bills, but not broadly enough.

The deepest problem may be structural. Once a tax privilege is granted, it calcifies. The reform includes a five-year review clause, suggesting these breaks could be revisited. But da Nóbrega is skeptical. The groups that fought hard enough to win these concessions will fight harder still to keep them. "If they were competent enough to obtain the privilege, they'll be even more competent at defending it," he said. "It's naïve to think there will be real revision." The reform may simplify the tax code, but it risks entrenching inequality in the process—a trade-off that troubles the very experts who otherwise support the overhaul.