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As Brazilian police busts go, last summer's Operation Freeloader wasn't a big deal.
The $55 million allegedly purloined by marketing miscreants paled before the Petrobras scandal, in which scores of government contractors and political operators looted Latin America's biggest company.
But after the June 28 police raid, when a slick video of a wedding hit the web — with guests bottle-chugging champagne, shooting confetti canons and frolicking at a seaside resort — Brazilians paid attention.
That's because thanks to the manipulation of a federal program of subsidies for the arts, the wedding and video were bankrolled by Brazilian taxpayers.
The video is now an exhibit in the federal police probe, which led to the arrest of 14 suspects (10 of whom were later released), roiled and put Brazil's cultural policy on the pillory.
A congressional committee is set to launch a formal inquest into the scandal, and President Michel Temer's Ministry of Culture is trying to placate critics and overhaul the protocols for a system that "still lacks adequate controls over project management and provides insufficient information on financial movements and accountability by applicants," federal auditors recently concluded.
Brazil's bards and artists aren't inherently opportunist; but they are collateral beneficiaries of a political culture in thrall to dirigisme, in which competing groups fight bureaucratic distortions by creating other distortions. "Because 90 percent of tax revenue is spoken for due to constitutionally mandated earmarks, interest groups invent fiscal incentives to bypass the national budget," former Brazilian treasury secretary Bernard Appy told me. "That leaves little space for democratic debate over how to allocate public money."
Brazil's current cultural incentives date back a quarter-century, when then President Fernando Collor de Mello set out to funnel private capital into the arts. Collor fell to corruption charges in 1992 but his reform stuck: Some 3,100 stage, dance, music and book projects are flourishing under the Rouanet Law, named for former cultural minister Sergio Paulo Rouanet.
Under its provisions, artistic producers submit their ideas to a review board of bureaucrats and cultural notables. Greenlighted projects then court private sponors, who may write off up to four percent of their federal taxes as cultural investment.
Along with the aspiring talent, however, came the vultures. Just as in Europe, where celebrity artists vie with struggling artists for public funds, Brazil's big cultural write-off winners include some of its best known producers and performers — precisely the acts who could survive without subsidy. Productions blessed by the Rouanet Law include Cirque de Soleil, adaptations of Broadway plays and pop stars. Some of these shows also sold tickets at market rate, enabling producers to pocket both subsidies and box office receipts, while risking little of their own capital.
"If producers run no risks, the whole system becomes less responsible," said political scientist Fernando Schuler, of the Sao Paulo university Insper, who has studied cultural incentives. One witness told police the scheme had been operating for 20 years.
Because tax breaks and easy money are as Brazilian as flip flops, such irregularities long drew little more than a shrug. Economist Marcos Lisboa writes this off to Brazil's "half-price culture," a reference to the country's penchant for gifting privileged groups with public largesse, such as sweetheart loans for corporate giants and tuition-free public universities even for wealthy prep schoolers. "Public spending is life," Lula's gung-ho chief of staff, Dilma Rousseff, quipped in 2005 over warnings that Brasilia was overspending.
Eleven years on, the Brazilians' patience for official profligacy has worn thin. Rousseff, who succeeded Lula, was impeached on Aug. 31 for monkeying with the federal budget to hide huge shortfalls, a game that ended in a brutal recession, a junk rating for Brazilian bonds and soaring public debt.
A good part of that hole was dug by the government soft loans to some of the country's biggest corporate acts, such as contracting giant the Odebrecht Group, which from 2007 to 2015 sucked in 70 percent of all subsidized engineering loans from the state development bank.
The cascade of incentives failed to lift Brazil's economy, but according to federal prosecutors, it topped up the campaign war chests of the ruling Workers Party and its allies.
Cultural scammers play a bit part in this fiscal carnival. And don't hold your breath over the congressional inquest, which in its haste to make headlines last week subpoenaed an artist who had died last year. But who knows, the scandal might help Brazilians rethink their onerous half-price culture and separate deserving talent from the artful freeloaders.
— Margolis is a Bloomberg View contributor based in Rio de Janeiro.