Can Tax Reforms Shape Food Consumption? An Investigation of the Impact of the Brazilian VAT

The need for a tax reform in Brazil stems from the country's complex tax system, which has contributed to decreased productivity and hindered investments. The Brazilian Tax Reform, approved in December 2023, introduces a Value-Added Tax (VAT) system comprising a federal VAT (CBS), a local VAT (IBS), and a selective tax (IS) on products with negative health and environmental externalities. This study explores the potential impacts of various scenarios of the reform on consumption, using data from the latest Household Budget Survey (POF 2017-2018). Our findings indicate that a broader tax reform (in terms of food basket exemptions and selective taxes on ultraprocessed products) could result in a decrease in 8.80% of government tax collection on consumption. However, consumption patterns would shift significantly, with a sharp increase in healthy food consumption and decrease in ultra-processed food. The scenario considering the newest tax rate proposal, which is more conservative in terms of exemptions and includes a selective tax only on one type of ultra-processed product (sweetened drinks), suggests an increase in government revenue but highlights reductions in the consumption of both in natura and ultra-processed products. These results underscore the reform's potential to influence consumption patterns and highlight the balance between generating tax revenue and ensuring the affordability of essential goods. In this sense, there is room for improvement in the newest tax proposal to achieve a more nutritional balance within Brazilian households.