Before moving on to explain the

Before moving on to explain the analysis framework and the tools developed, it seems appropriate to briefly underline how the crisis translates into various shocks to the Brazilian economy. As notes Araújo, “the main LDN193189 Hydrochloride of transmission of the international crisis for Brazil refer to credit, decrease of trade and global demand and expectations” (Araújo and Gentil, 2010). A brief first task is to summarize how the crisis is transmitted to aggregate demand of the Brazilian economy, with severe negative impact. The decrease in final demand from the side of exports demand is accompanied with a worsening of investment expectations in conjunction with credit crunches at the heights of panic events during the crisis, and also in general by the global deleverage that has been happening since the onset of the crisis (Gonçalves, 2009). The impact on investments is also seen (Domingues et al., 2010), and both weaknesses are translated and spread through the whole internal economy as less production, tax income and employment level, which in turn can decelerate both government revenue, expenditure and internal final demand (IPEA, 2009b). The effects, it is worth mentioning, are cumulative, leading to a recursive fall in tax collection, and, depending on its force, could even trigger a deflationary spiral. A countercyclical monetary policy, in response to shocks like this, involves the injection of liquidity – including the diminution of the interest rate and credit provision to the most affected actors by international contraction. With some delay and hesitance regarding interest rate policy loosening, due mainly to the tacit independence of the Central Bank of Brazil and its sole focus on controlling inflation, such measures were progressively put into place (IPEA, 2009a). Our focus, however, is about the impact of fiscal policy as a counterweight to the crisis. One of the implicit assumptions of any proposal to reduce a VAT (value-added tax) is that it acts positively on consumption demand, by the impact of price reduction for the final consumer, partially offsetting the drop in exports with an increased domestic demand (Manente and Michele, 2010, p. 407). Finally, the impulse for sales would be indirectly reflected in the production which, because of the interdependence of the system’ sectors (a main focus of input–output approach), would result in a positive effect on other components of Final Demand, among other investments. Finally, the positive effects would result in augmented tax revenues, by the increase in consumption and production, counterbalancing the initial fall in tax income.
Tax policy and the crisis in Brazil
Analysis framework The lack of updated data (Guilhoto, 2011, p. 20) that would enable to sufficiently assess the real effectiveness of economic policy measures cited has made it necessary to build a model to evaluate its potential efficacy. The last input–output tables, made available by IBGE with 55×55 activities, are from the year 2005. But NEREUS Group provides updated estimations of new Input–Output Matrixes, which, for the purposes of this study, remain very similar to original ones available (Guilhoto, 2010). Thus, we shall use their 2008 estimated tables. During the last centuries economists such as William Petty (1623–1687), Richard Cantillon (1697–1734), and François Quesnay (1694–1774) through their work tried to disseminate the wide range of applications in economy of methods that later gave birth to input–output methodology. It was, though, with Wassily Leontief (1905–1999) that applications of Matrix Algebra were faster spread in the field of economic science. From his method it was feasible to capture impacts of economic shocks. In that comprehensive appraisal, his developed methods and ideas are considered by many as a composition of fisiocratic, walrasian and marxist ideals. Therefore, Leontief\'s inverse was established as an efficient method of estimation of direct and indirect impacts of changes in economic variables.