Brazil’s Haddad says income tax reform to be neutral, take effect in 2026

By Marcela Ayres

BRASILIA (Reuters) – Brazilian Finance Minister Fernando Haddad said on Thursday that a reform proposed by the government to increase income tax exemptions for the middle-class will be fiscally neutral and analyzed by Congress in time for it to take effect in 2026.

After weeks of delays, Brazil on Wednesday announced a package to contain mandatory spending, accompanied by an unexpected income tax reform aimed at easing the burden on the middle-class to mitigate potential negative public backlash.

Haddad told a press conference that the move to increase the exemption threshold for those earning up to 5,000 reais a month had an estimated 35 billion real ($5.89 billion) fiscal impact, which would be fully neutralized by compensatory measures.

The government said the compensation would come from setting a higher effective tax rate for the wealthiest. According to Haddad, those earning more than 600,000 reais per year will face an effective income tax rate of 10%.

The current effective tax rate is 4.2% for the top 1% of earners and 1.75% for the top 0.01%, government figures showed.

When questioned about introducing the measure now despite its expected implementation only in 2026, Haddad said the decision was to “finalize all measures this year” to make “our project clear”.

He had previously said the issue would only be addressed next year.

MARKET TURMOIL

Before the official announcement, reports of an increase in the income tax exemption from the current 2,824 reais soured market sentiment. The currency plummeted to its weakest level on record, while interest rate futures surged.

“The fiscal tightening measures failed to live up to expectations and reinforce the idea that political commitment to stabilizing the public finances is lacking,” Capital Economics’ deputy chief emerging markets economist Jason Tuvey said.

The real weakened past 5.98 per dollar in spot trading on Thursday.

Haddad said the U.S. dollar had been strengthening globally, and told the press conference that inflation in Brazil is expected to end the year within or very close to the official target range of 1.5% to 4.5%.

The government also outlined that the mandatory spending control package announced on Wednesday is projected to generate a fiscal impact of 327 billion reais between 2025 and 2030.

The measures, which have yet to be formalized and voted by Congress, also include tighter restrictions on the BPC social benefit, aimed at assisting the elderly and disabled, and enhanced oversight of the Bolsa Familia welfare program.

($1 = 5.9377 reais)