Brazil's VAT Reform: Improving Equity

IMF Working Papers, June 26, 2026

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Reform approved in 2023 with the primary objective to eliminate distortions and reduce the complexity of the current consumption tax system while maintaining revenue neutrality.
Specific design features included to alleviate the VAT’s inherent regressivity and improve the equity of the Brazilian tax system.
Assessment uses a microstatic model based on household data and simulates policy options to further improve distributional outcomes.

The new VAT achieves a fairly equal distribution of the tax burden across most income groups, but the poorest still carry a heavier load in terms of their disposable income.
Dissecting the impact by policy instrument:
- The reform’s approved reduced rates aggravate regressivity.
- Zero rates and the new cashback lower the tax burden for poorer households, under the revenue neutrality assumption.
Combined use of reduced rates, zero rates, and cashback dampens the reform’s equity outcomes somewhat because a higher VAT reference rate is required on all other items to maintain revenue neutrality.
Some equity improvements stem from the reform’s implied pivot towards taxing services.
Simulations show that focusing on and expanding the cashback could amplify equity gains by raising the poorest disposable income by 25 percent via reductions in their tax liability.

Microstatic modeling based on household data is used to estimate the reform’s expected equity print and to simulate alternative policy options.
Equity effects are decomposed by policy instrument (reduced rates, zero rates, cashback) to identify which elements lower or raise regressivity under the revenue neutrality constraint.
Revenue neutrality implies an offsetting higher VAT reference rate on items not receiving relief, affecting net distributional outcomes.

Expanding and focusing the cashback is highlighted as a policy option with large equity potential:
- Simulation result: raising the poorest disposable income by 25 percent via reductions in their tax liability.
Trade-off identified: using multiple relief instruments (reduced rates and zero rates plus cashback) reduces regressivity of targeted items but necessitates a higher reference rate elsewhere, partially offsetting equity gains.
Pivot toward taxing services contributes to equity improvements and should be considered in policy design and implementation.

Source: Brazil's VAT Reform: Improving Equity, IMF Working Paper No. 2026/132.