Capital taxation: theory and práxis (and the Brazilian case)

Abstract This paper shows how the theoretical assumptions that supported the current model of income taxation in Brazil (and in other countries influenced by the liberal ideology) are undergoing a significant international revision as a consequence of the increase in inequality and the maturation of the theory of optimal taxation. This review indicates that both the progressivity and the taxation of capital income can be made compatible in a neoclassical framework that seeks a balance between the search for equity and economic efficiency. In particular, it is concluded that: the total exemption of distributed profits and dividends, as takes place in Brazil, does not guarantee the neutrality sought by neoclassical models based on more realistic hypotheses about the behavior of economic agents; the dual income tax model, in the different formats adopted by the Nordic countries, can serve as a reference for a reform that will guarantee alignment of the treatment of capital incomes and, at the same time, a greater burden on extraordinary incomes.