By Marcela Ayres
BRASILIA, Sept 4 (Reuters) – Brazil’s wealthiest captured a record share of national income under President Luiz Inacio Lula da Silva, tax-return data show, offering a striking counterpoint to the leftist leader’s effort to convince voters that gains have been widely shared under his administration as he seeks reelection in October.
Lula has pointed to falling inequality, as measured by a record-low Gini coefficient in 2024, and rising employment as evidence that his administration prioritizes poorer Brazilians.
But tax-return data paint a more complex picture: high interest rates, partly a consequence of increased government spending, fueled a boom in financial income that disproportionately benefited the wealthy, even as stronger labor markets, wage gains, and social programs improved conditions at the bottom of the income distribution.
“If government benefits, on the one hand, are well targeted, they can have a positive social impact,” said Otaviano Canuto, a former World Bank vice president.
“But, on the other hand, the arithmetic of public debt is unforgiving,” he added. “There is no way around it.”
Monetary policy in Brazil, Canuto said, has had to deal with an “ultra-expansionary” fiscal policy, and concerns over rising public debt have pushed up the premium investors demand to hold Brazilian bonds.
As a result, higher government borrowing costs generate larger interest payments that disproportionately benefit wealthy households, who hold more financial assets.
Estimates by inequality researcher Sergio Gobetti based on the latest detailed tax filings show the richest 0.1% of Brazilians having increased their share of national income to a record 13.1% in 2024 from 10.2% in 2020.
During that period, the central bank lifted the Selic rate from a record low of 2% to 12.25% to tame post-pandemic inflation and cool economic activity amid government fiscal stimulus.
Because around half of Brazil’s public debt is linked to the benchmark Selic rate, higher borrowing costs quickly translate into larger returns for investors, creating a paradox in which efforts to ease consumer prices also help the country’s richest households capture a larger share of national income.
“The more I raise interest rates, the more income holders of (floating-rate) bonds receive,” central bank chief Gabriel Galipolo told the Senate in May.
This phenomenon predates Lula — occurring also under his former rival, far-right President Jair Bolsonaro — gaining force in the past years as public debt expanded and Brazil became increasingly reliant on floating-rate bonds amid persistent fiscal concerns and a tough global backdrop.
Since the leftist leader took office, gross public debt has risen more than 10 percentage points of GDP to 82.5%, while the Treasury expects the share of floating-rate securities to surge nearly 15 percentage points to a record high of as much as 53% this year.
As a result, higher interest rates now apply to both a larger debt stock and a greater share of securities linked directly to the Selic rate.
The presidential palace did not immediately respond to a request for comment.
THE ROLE OF INVESTMENT GAINS
The tax data analysis offers a more nuanced perspective on income distribution than Brazil’s record-low Gini, the most widely used measure of inequality, by showing how a growing share of Brazil’s economic gains is flowing to a small group of wealthy households.
That, economists say, limits the power of economic growth to broaden opportunities across society.
Marcelo Medeiros, an economics professor at the University of Illinois Urbana-Champaign, said household surveys used to calculate the Gini tend to capture labor income well but often fail to fully reflect investment gains that are more common among affluent individuals and more comprehensively reported in tax data.
“The Gini reflects only one part of society — the part that is not very rich,” Medeiros said. “Brazilian inequality is driven primarily by the inequality that exists among the rich and between the rich and everyone else.”
Estimates based on the latest available tax-return data compiled by Gobetti show financial income, mainly fixed-income returns, accounted for nearly one-third of the increase in the income share of the richest 0.1% between 2020 and 2024.
A Reuters analysis of withholding tax records also found collections on fixed-income earnings from investment funds and other fixed-income assets jumped 325% from 2020 to 2024, when they reached 92.1 billion reais ($18.1 billion).
The surge far outpaced growth in revenues from labor-income taxes and other major categories of income taxation, with Brazil’s federal revenue service saying the increase was “mainly due to a higher Selic interest rate.”
The Finance Ministry said higher borrowing costs likely contributed to the increase, but cautioned that revenues also reflect investors’ portfolio decisions and that tax data alone do not establish a definitive causal relationship.
The ministry added that it has pursued measures since 2023 aimed at reducing inequality through greater tax fairness. The central bank declined to comment.
NO SIGNS OF SLOWING
While detailed tax-return data for 2025 are not yet available to estimate income concentration, the fixed-income boom shows no sign of slowing.
Tax collections on returns from investment funds and other fixed-income assets rose another 25% from 2024, again outpacing growth in revenues from labor-income taxes and interest-on-equity payments.
Although Brazil’s central bank began easing in March, policymakers argue borrowing costs must remain restrictive to bring inflation, now at 4.2%, to the 3% target.
Analysts see less room for further cuts than at the start of the year, citing a tougher global backdrop and government measures supporting consumption that could complicate disinflation efforts.
A weekly central bank survey shows economists expect the Selic, now at 14%, to fall to just 12% next year, suggesting a key source of income gains for wealthier households is unlikely to fade soon.
($1 = 5.0983 reais)
(Reporting by Marcela Ayres, editing by Manuela Andreoni)
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