The reform on income tax increases the tax preassure

The government has established a decrease in the income tax for a group of workers compensating the revenue loss by increasing other taxes. The design of the tax change is technically poor. On one hand, it temporarily reduces tax pressure only on some wages, as sustained inflation will raise it again. On the other hand, it intends to create new taxes that will leave Argentina out of place in the regional competition for new investments. The most troubling issue is that neither the ruling party nor the opposition is showing signs of thinking innovative ideas. 

The government introduced a reform on workers tax deductible wages. The purpose, as in previous occasions, is moderating the spurious increase in the tax burden caused by inflation.  On this occasion, changes were implemented with a lot of improvisation and technical carelessness. Besides, it’s accompanied by a bill that proposes a tax financial income on transactions executed outside the stock market and the creation of a specific tax on companies paid dividends.

The new financial income tax envisions a 15% rate and the tax on dividend proposes a 10% rate.  In the latter case, one must consider that corporate profits are already taxed at a 35% rate. Thus, the new tax on dividends overlaps with the current corporate tax profits. Thus, companies in Argentina will pay a 41, 5% tax on profits.

An interesting analysis is to compare the income tax rate applied to incorporated companies in Argentina compared to neighboring countries. According to tax laws surveys periodically carried out by the World Bank it can be seen that:

· In Uruguay, the tax on corporate profits is 25%.

· In Chile, the tax on corporate profits is 20%.

· In Brazil, the tax on corporate profits is 15%, with an additional 10% for incomes over 240 thousand real.

These data shows that the tax modification proposed in Argentina will nearly double the tax rate on companies relative to that of neighboring countries. The issue is relevant because the income tax is one of the most important factors when assessing the viability of investment projects. Even Brazil, who follows Argentina in tax pressure level and distortive taxes, the income tax rate, is 25%. In a context where technological progress facilitates communications, it is expected that this tax increase will deepen the trend to concentrate investments in Uruguay, Chile and Brazil, and to sell the products in Argentina with minimal added value produced within the country.

The income tax reform is poorly designed and contains a high dose of hypocrisy.  First, because it has partial coverage (it only reaches employees in the $8,000 to $12,500 salary range and to a lesser extent, those between $12,500 and $20,000) discriminating against other employees and all freelance workers. In the second place, because its impact is transitory since inflation will continue causing “beneficiaries” to stop being so.  Finally, because the whole society will suffer investment discouragement caused by disproportionate taxation on corporate profits.

For the tax burden reduction to be genuine it has to be part of a plan to improve the state management proficiency. It would be enough to eliminate some the many absurdities that abound in public spending decisions in order to create the fiscal space required for tax reductions. Absurd subsidies can be swiftly eliminated, like the ones that go to Aerolíneas Argentina’s and other loss-making public enterprises. With a little better judgment and higher professionalism energy and urban transport subsidies can be eliminated and complemented with social tariffs in order to avoid harming the poorest households. 

The main concern that arises is that the opposition is not showing any signs of different ideas. Proof of this is that they have not established as a priority the improvement of the state management improvement. Without reducing public over-spending, tax reductions are demagogic and involve more inflation and less employment and investment.