Regional impacts of tax reform: lessons from a CGE analysis for Rio Grande do Sul

Abstract

Tax reform usually implies reallocation of the economic factors and changes in the sectoral and regional productive structure. This paper aims to analyze the effects of a tax reform program such as that involved in the PEC n. 233/08 whose the main issue is the harmonization of the VAT tax rates (ICMS) among Brazilian states. In order to account for all changes in prices and reallocation of factors in the economic system we use an interregional CGE model calibrated for two regions (Rio Grande do Sul and Resting of Brazil) and the simulations are carried out base on the assumption that effective tax rates at the regional level converge to the national tax rates. The results show that harmonization of ICMS causes an increase in average tax rates of ICMS in Rio Grande do Sul, and negative impact on GDP and employment but a positive impact on revenues. The potential positive impact of tax reform on the revenues collected by Rio Grande do Sul is reduced by the new rules for appropriation of ICMS defined in PEC n. 233/08 but the net effect remain positive on tax revenues.