Introduction

Although the title may seem to address a very complex and even distant issue from everyday life, the truth is that we deal with this subject daily without even realizing it. Whether it's in the news, the eternal disagreement between the president, governors, and mayors regarding taxation, or even the changes we feel in the taxes we pay.

Understanding this subject is important not only for legal professionals, who can use this knowledge to better contextualize their work, especially in tax matters, but also for the entire population, who will come to understand why we have so many taxes, as well as why there are federal, state, and municipal taxes.

This short excerpt is by no means intended to convince you to be sympathetic to taxation; our goal is simply to present a small part of the tax system and thereby foster a richer debate about taxes. If the pursuit of knowledge fascinates you, I strongly recommend that you enroll in IDP courses, where the debate is led by highly qualified professors with extensive experience in the job market and the academic world. 

What is federalism?

Federalism is a form of state organization in which states relinquish their sovereignty to the union, but maintain their autonomy to govern themselves. This is why we call the federative entity at the national level the Union; it is also the origin of the name United States of America and even the first name of the Brazilian republic, which was the Republic of the United States of Brazil.

In classical federalism, the federation is projected on 2 (two) levels, Union and States, as is the case with the United States of America, for example. But in Brazilian federalism, the federation is projected on 3 (three) levels, Union, State and Municipalities, that is, just like the jabuticaba fruit, the municipality as a federative entity only exists in Brazil.

One of the reasons the Brazilian federation is the way it was created is due to its structure. Unlike the United States of America, Brazil did not have independent states that decided to unite in a federation (centripetal union), but rather it was a unitary state that decided to divide itself into several autonomous states (centrifugal union).

When a federation is created, the states, in addition to ceding their sovereignty to the Union, also grant certain powers, mainly legislative, to the Union. The transfer of these legislative powers from the states to the Union takes the form of the creation of legislative competencies; that is, each entity can legislate within the scope of a specific subject matter. This division follows several criteria, the most important of which is interest. Matters of national interest fall under the Union's jurisdiction, matters of regional interest fall under the state's jurisdiction, and, especially in Brazil, matters of local interest fall under the municipality's jurisdiction.

Among the legislative powers, the most important for maintaining the federative form of the state is the power to establish taxes. In the 1988 Federal Constitution, articles 153, 155, and 156 established the tax powers for establishing taxes, respectively, of the Union, States, and Municipalities.

But before we understand the importance of tax jurisdiction for the federative form of the state, we first need to understand what the autonomy of the entities is.

Autonomy, the cornerstone of federalism.

As mentioned earlier, in the logic of a federal state, the federated states do not possess sovereignty, but they retain autonomy. Therefore, to understand what constitutes the autonomy of a federated state, it is imperative to understand two dichotomies: Sovereignty vs. Autonomy, as well as Unitary State vs. Federated State.

Sovereignty is understood as the power of self-regulation in its broadest form; note that it is not unrestricted, there are certain mechanisms that restrict the exercise of this power. A sovereign state is characterized by one that is not subordinate to another state and has the legitimacy to participate in international treaties with other federated states.

Autonomy, on the other hand, is understood as self-regulation in a narrower form; that is, unlike a sovereign state, an autonomous state is subject to more control mechanisms. An autonomous state will manage within its regional interests without the possibility of directly intervening in other federated states, and will also be unable to participate independently in international negotiations with other states.

This dichotomy becomes clearer when we understand the difference between a Unitary State and a Federated State. In both states, state sovereignty exists, but autonomy is absent within the unitary state, as we will show.

A unitary state is characterized by the existence of a single government that oversees all interests, whether national, regional, or local. There is no self-regulation in this form of state; there is an extreme concentration of power in the central government. Administrative divisions may exist within a unitary state, but these are subordinate to the central government. To illustrate, recall the Roman Empire, which was divided into provinces, each with its own governors (proconsul), but all subordinate to the emperor's directives. 

A federated state, on the other hand, is a composition of multiple governments, each acting in its respective field of interest. In a federated state, there is one entity that enjoys sovereignty, but all other entities of the federation have the right to autonomy; that is, there is no relationship of subordination between the Union and the States. The States can govern freely, as long as they respect the limits imposed by the Federal Constitution.

Therefore, the cornerstone of federalism is the existence of autonomous states; without autonomy there is no federation, but rather a unitary state. The question that arises, then, is how is it possible to guarantee the autonomy of the federated state? What underpins this freedom?

Political autonomy = financial autonomy

The autonomy of states is, in essence, the possibility of carrying out projects and pursuing their interests without the need for authorization or external assistance. If every time a state needs to take a measure it requires help from the Union, then the Union would ultimately be in a privileged position in relation to the state. Not only because it is the provider of the means, but also because it has the possibility of simply refusing to transfer the funds to the state and, in this way, indirectly influencing the state's policy.

In order for the state not to depend on the Union to take the political measures it deems appropriate, it is imperative that it have an independent source of income, one that does not pass through the Union, but is earned directly by the federative entity. Thus, autonomy necessarily involves granting the state an autonomous source of income.

States, in general, do not have direct economic activity as their main source of revenue, but rather taxes. Therefore, it is completely understandable why the Federal Constitution grants states the possibility of establishing their own taxes; otherwise, states would never be truly autonomous, since they would always depend on the federal government for resources.

In the case of Brazil, since states are not the only federative entities, municipalities are also designated as federative entities, and therefore they too must have the power to establish their own taxes. It is for this reason that the Brazilian tax system has established taxes at different levels, which are collected by different federative entities.

Therefore, fiscal autonomy goes hand in hand with financial autonomy. 

If this topic has piqued your interest, we recommend studying with the best, whether at the undergraduate, postgraduate, master's, or doctoral level. IDP boasts a wide range of highly qualified professors, so don't waste any time and enroll in our courses!

References

The Cost of Rights: Why Freedom Depends on Taxes; HOLMES, Stephen, WMF Martins Fontes Publisher, 2019.