Distributional Impacts of Brazil’s Tax Reform: scenarios regarding Cesta Básica exemption

A consumption tax reform in Brazil has been recently approved by the House of Representatives, providing a full tax exemption for the yet undefined ‘National Basic Basket’ of goods (cesta basica nacional), alongside a cashback scheme that is yet to be determined. This note simulates the distributional impacts of different fiscally neutral scenarios of reduced rates and exemptions. The authors show that the exemption of taxes for food and personal care goods (such as those suggested by Law 10,925) would benefit the most vulnerable. Nonetheless, overall expenditures on certain items that are being considered for inclusion in the cesta are relatively concentrated on households in the top decile of the income distribution. Thus, a blanket exemption on Cesta Basica items may benefit the richest more in absolute terms. If the list of items in the exempted Cesta Basica is shortened and the equivalent resources of the potential forgone revenues are returned into a targeted cashback scheme, a far less regressive indirect tax system could be achieved.