Towareds a Truthful Land Taxation Mechanism in Brazil

Abstract

This paper shows that the asymmetric information present in the relationship between the government and agricultural producers has led to persistent problems in the application of land taxes (Imposto Territorial Rural - ITR) in Brazil. The main result is that, when the asymmetric information is taken into account, some use of output taxes in the optimal tax scheme may be more desirable than a pure land tax regime. Herein, we consider a model of optimal taxation in which the government maximizes the expected tax revenue less the farmer's yields from a non-agricultural activity. There is a continuum of farmers usin g land to produce a homogeneous agricultural output and for non-productive ends. They have private information on the parameters of both activities. Also, there is no land rental market, and the harvested area cannot exceed the farm size. We show that a pure land tax regime is optimal only if there is complete information or there is no idle land in equilibrium. A composite tax mechanism, which simultaneously considers taxes on land and output, can be used to implement the optimal scheme in the case of incomplete information. Nowadays, the ITR rate is a function of the degree of use, which is not observed by the government, and farm size. Our study implies that ITR rate should depend on farm size and the rCMS (Value-added tax on sales and services) per hectare, which is a reliable proxy for land use.