William Lewis

The Power of Productivity

Undistorted competition in the product market makes economies healthy. That's why product market distortions are much more important than labor market distortions. However, part of a healthy economy is that unsuccessful owners and managers do not come out all right in the end. That's why they fight so hard for protection. That's part of the reason globalization is under such attack.

Brazil has made remarkable progress over the past decade in reforming its economy to eliminate favoritism for business special interests. However, Brazil has another big problem. Most people don't recognize the destructive power of big government. Big governments demand big taxation. When part of the economy is informal, and untaxed, the burden falls heavily on legitimate businesses. This is a burden today's rich countries did not have when they were poor.

Brazil's government spends 39 percent of Brazil's GDP. The U.S. government spends about 37 percent. Brazil already looks a little out of line. However, Brazil is in a dramatically different position for raising the money to pay for that much government spending. Government spending has to be financed primarily by taxes. The U.S. government is able to tax most business entities and most individuals. The U.S. government can do this because virtually all businesses and all people are registered with the government. The government knows who they are and where they are. If some don't pay their taxes, the government comes after them.

Not so in Brazil. About 50 percent of the workers in Brazil are not registered with the government. Many small businesses are also not registered. Often, these people are desperately poor and living near subsistence. No country has the heart to go after these people for tax money. Even if they did, they would collect very little from each person. However, because we're talking about roughly 50 percent of the workers in Brazil, the total tax revenue forgone is substantial. But collecting this money is not a possibility even if the government wanted to. The workers and small businesses would be virtually impossible to find. The costs of collecting taxes from them would probably be more than the revenue raised. This means that most of the tax revenue has to come from larger businesses and some individuals.

Unlike the United States, Brazil has chosen to collect most of its taxes through corporations. Thus today, taxes paid by corporations in Brazil are almost twice as high as in the United States. However, that's not the right comparison. We should be making a comparison with the United States in 1913. That's when the United States had the same GDP per capita as Brazil today. In 1913 the U.S. government spent only 8 percent of GDP. Thus, as a percentage of GDP, the corporate tax burden in Brazil today is seven times that of U.S. corporations when the United States was at Brazil's current GDP per capita.