Brazil’s government said it was certain the Senate is likely to pass the measure to extend income tax exemptions to middle-class workers after the Lower House passed the bill late Wednesday.
The bill, supported by President Luiz Inácio Lula da Silva, is one of his administration’s signature pieces of economic policy and could make him more solid ahead of next year’s general election.
There were no hurdles in the upper chamber, Finance Minister Fernando Haddad said, adding that the reform strikes a balance between economic rigour and ambitions for wider social goals.
The government is framing the plan as a move toward a fairer tax system and an option for giving back purchasing power to millions of households.
Expanding the exemption threshold
The centrepiece of the legislation is raising the monthly income tax exemption limit.
The exemption on federal income tax for workers up to 5,000 reais ($940) a month will be in place starting next year.
The exemption currently applies only to income of up to 3,036 reais, meaning adjustment will take tax benefits beyond three minimum wages.
The expansion is set to free about 15 million workers from a financial burden, leaving them with more disposable income just as soaring prices have squeezed many Brazilian households.
The measure doesn’t merely end at the exemption ceiling: it will also reduce the tax burden on those earning up to 7,350 reais, taking relief further into the middle class, as lawmakers also demanded.
Progressive loss mitigation strategies
While the plan loses revenue by expanding exclusions, the Act includes offsetting measures. A new progressive minimum tax will be levied on monthly revenues above 50,000 reais.
Additionally, a 10% withholding tax will be applied on profits transmitted abroad, whether to individual investors or corporations.
The measure also states that dividend payments of more than 50,000 reais in a single month from the same company to the same individual will be subject to the same 10% rate.
These policies are designed to ensure that wealthier taxpayers bear a higher part of the fiscal adjustment.
Balancing fiscal impact
The bill’s author in the Lower House, Arthur Lira, estimated the reform would cost the government 31.3 billion reais in revenue in the next fiscal year.
However, he estimated that 25.2 billion reais would be returned to the treasury from new income tax collections, and another 8.9 billion reais from taxation of dividends sent abroad.
The projections illustrate how the administration is attempting to keep the budget balanced, while reducing the burden on lower- and middle-income earners.
This fiscal orientation embodies Lula’s larger commitment to a taxation regime that he has characterised as central to income redistribution and domestic consumption.
Political stakes ahead of 2026
The middle class has emerged as a key electoral battlefield. In recent years, most of this voter bloc has switched to more conservative parties, providing challenges to Lula’s Workers’ Party.
By providing genuine economic help to families earning three to seven minimum wages, the president seeks to rebuild confidence and strengthen his coalition ahead of the 2026 general election.
The timing of the reform is important. While investors and rating agencies will closely monitor its budgetary ramifications, the immediate political rewards may have a greater impact.
Tax cuts for millions of workers might enhance consumer mood and support Lula’s narrative of inclusive prosperity.
Next steps in the Senate
The government expects the Senate will also approve it quickly, after the Lower House passed it unanimously.
Lula and Haddad have been asserting the measure will win wide backing because it strikes a balance between fiscal responsibility and socio-economic justice.
Should the reform pass, the change would represent one of the most significant tax reforms in recent history, realigning income taxes in Brazil and sending a signal of a revival of a progressive movement in fiscal politics.
For the administration, it is not just an economic milestone but also a political wager that the middle class will be a decisive force for the nation going forward.
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