In a sweeping move that could reshape Brazil’s economic landscape, the lower house of Congress unanimously approved a bill on October 1, 2025, dramatically expanding income tax exemptions for millions of working Brazilians. The legislation, one of President Luiz Inácio Lula da Silva’s signature campaign promises, raises the monthly income threshold for exemption from 3,000 reais to 5,000 reais—about $940 at current exchange rates. If signed into law, the reform is expected to benefit between 15 and 16 million people, according to government estimates reported by AP and AFP.
The bill’s passage marks a significant milestone for Lula’s administration, which has championed the measure as a crucial step toward what it calls “tax justice.” Lula, who is widely expected to seek reelection in 2026, celebrated the vote on X (formerly Twitter), calling it “a victory in favor of tax justice and the fight against inequality in Brazil, benefiting 15 million Brazilian workers.” His message echoed the sentiments of many in his left-leaning coalition, who have long argued that Brazil’s tax system unfairly burdens the poor while allowing the wealthy to pay proportionately less.
But the bill’s support extends beyond Lula’s own allies. In a rare show of unity, members of the opposition—including the party of former right-wing president Jair Bolsonaro—joined in the unanimous vote. This level of consensus is unusual in Brazil’s famously fractious legislature, especially given that Lula’s coalition does not command a majority in the chamber. Political scientist Luciana Santana of the Federal University of Alagoas told AP that the measure’s broad appeal was no accident. “It will have a big impact on a considerable portion of the population and it’s something the government needs: a policy with broad societal impact,” she said.
The reform’s core provision is straightforward: Brazilians earning up to 5,000 reais a month will no longer pay income tax. That’s more than double the previous exemption, and, according to Brazil’s national statistics agency IGBE, it covers the vast majority of the population—nearly 90% of Brazilians earned less than 4,040 reais per month in 2024 when measured by household income per capita. For many families, the change could mean more money for essentials, savings, or paying down debts. Economist Carla Beni of the Getulio Vargas Foundation told AP, “People will either spend more, save or pay off debts.”
Yet, the reform is not without its critics—especially among investors and financial markets. When the proposal was first unveiled last year, alongside planned spending cuts, it triggered a historic depreciation of Brazil’s currency. Investors worried that exempting so many from taxes would blow a hole in the government’s budget, potentially forcing deeper cuts or risking fiscal instability. The government’s answer? A new tax on the wealthy.
To offset the expected loss in revenue, the bill introduces a minimum effective tax rate for high-income individuals. Anyone earning more than 600,000 reais (about $113,000) a year would see their effective tax rate gradually increase, reaching up to 10% for those making over 1,200,000 reais (about $226,000) annually. Currently, this group—numbering around 141,000 people—pays an average effective tax rate of just 2.5%, according to Brazil’s Finance Ministry. For those earning more than 50,000 reais a month (roughly $9,400), the rate would also rise to 10% from the current 2.5% average.
The bill’s sponsor, lawmaker Arthur Lira, described the measure as “tax justice” for “those who earn the least.” House Speaker Hugo Motta, who is not a member of Lula’s party, echoed this sentiment after the vote, stating on social media, “Income tax exemption is not a favor from the state, it is the acknowledgement of a right, a step forward in the country’s social justice, ensuring more money on the table for those earning up to 5,000 reais.”
The political timing of the bill’s advancement is notable. Earlier this month, lawmakers faced a wave of public protests over controversial proposals including an amnesty for Bolsonaro and others convicted of attempting a coup, and draft legislation that would have made it harder to prosecute or arrest lawmakers for alleged crimes. Those initiatives were ultimately shelved following public outcry. Some analysts, like Santana, believe that Speaker Motta’s decision to push the tax exemption bill now may have been a strategic move to restore lawmakers’ popularity after these unpopular episodes.
While the bill has been lauded as a win for the middle and working classes, it remains controversial among Brazil’s financial elite and in international markets. Investors remain wary, fearing that the combination of tax cuts for the majority and higher rates for the wealthy could dampen investment or prompt capital flight. Still, the measure enjoys overwhelming support among ordinary Brazilians, who see it as long-overdue relief amid a cost-of-living squeeze and persistent inequality.
Both Lula and Bolsonaro had promised to double the income tax exemption during their fiercely contested 2022 election campaigns—though Bolsonaro, despite pledging similar reforms in 2018, failed to deliver. Lula’s successful push for the exemption could prove a potent political asset as he eyes another term in office. According to AP, the reform may help peel away undecided voters from Bolsonaro’s camp, especially as Lula’s own popularity has rebounded in recent months. His defense of Brazilian sovereignty, especially in response to U.S. trade tariffs, has struck a chord with many citizens.
Despite the bill’s popularity, its future still hinges on Senate approval. Lula has expressed confidence that the upper chamber will pass the measure, paving the way for him to sign it into law. If all goes according to plan, the reform would take effect on January 1, 2026, giving millions of Brazilians a financial boost at the start of the new year.
As Brazil’s Senate prepares to take up the bill, the country stands at a crossroads. The reform promises to reshape the tax code in ways that could reduce inequality and stimulate economic activity, but it also poses risks to fiscal stability and investor confidence. Whether the Senate will embrace the measure as enthusiastically as the lower house remains to be seen. For now, however, the prospect of more money in the pockets of millions has given many Brazilians reason to hope for a fairer economic future.
