5 survey ( _Pesquisa de Orçamento Familiar, POF_ ) they conclude that direct taxes (such as personal income taxes) in Brazil appear to be progressive, but their impact on inequality is relatively small because of their small size relative to GDP, whereas indirect taxes are regressive. Lustig and others (2012) also examine the incidence of direct cash transfers and conclude that it varies significantly depending on the program. Bolsa Familia is well targeted to the poor, but other programs such as the Special Circumstances Pensions (SCP) benefit relatively more the top quintile.

Azevedo and others (2013) show that between 2001 and 2011, approximately 40 percent of the reduction of inequality in Brazil can be attributed to changes in the labor markets, in particular to higher hourly earnings of low-skilled workers. Transfers (public and private) and noncontributory pensions<sup>1</sup> , contributed 20 percent and 18 percent to the reduction of inequality respectively. Demographic factors are one last important component in the reduction of inequality in this period - Brazil, as many other Latin American countries, is currently benefiting from its demographic dividend. The current UN World Population projections suggest that by 2020 the total-dependency ratio in Brazil will start to rise again. The fiscal implications for this can be significant, especially given the associated higher health and noncontributory pension expenditures.

The regressive nature of the overall tax system in Brazil is emphasized by Soares and others (2009). As of 2007, based on national accounts data, these authors estimate that indirect taxes accounted for over 40 percent of the total gross tax burden (excluding government transfers), whereas income and property taxes accounted for less than 30 percent.<sup>2</sup> Most of the taxation of income and property can be decomposed into corporate income taxes (close to 39 percent of the total taxation of income and property); property taxes, including the financial transactions tax (close to 27 percent); and personal income taxes (21 percent). In addition, these authors estimate that income and property taxes accounted for close to 44 percent of the increase in tax buoyancy (tax to GDP ratio) between 1997 and 2007, whereas indirect taxes accounted for about 33 percent of the increase.

Ferreira, Leite and Ravaillon (2010) look at the importance of changes in sectoral growth, heterogeneity in initial conditions, and macroeconomic and redistributive policy variables (social expenditures and inflation) on poverty dynamics in Brazil over the period 1985-2004, focusing on state-level data, as we do in this paper. They find significant differences in the poverty reducing effect of growth across sectors, but they argue that the largest source of poverty reduction over the period were government macroeconomic stabilization and redistribution policies, in particular, the large reduction in inflation and the expansion of Federal social security and social assistance programs. In contrast, state and municipal

> 1 The _Benefício de Prestação Continuada_ (BPC) program is a noncontributory pension addressed to poor elders over 65 years old and disable individuals with a per capita family income no greater than 25% of the minimum wage (around US$ 2.5 a day in 2012) . The BPC benefit started being paid in 1996 (one minimum wage for each beneficiary).

> 2 These taxes are estimated by the authors to amount to about 10 percent of GDP.