Report Nº: 79627/02/2019
The government ordered a reduction of distortionary taxes for certain sectors of production. This is a good sign, but it is insufficient to get out of recession and risky for the goal of fiscal balance. Improving VAT management is the way out of this challenging trade-off. In response to claims from the business chambers, the […]
In response to claims from the business chambers, the federal government established the reduction of employer contributions for a limited group of sectors with a strong presence in the interior of the country. Specifically, it was established that the production of fruits and vegetables and the elaboration of milk, eggs, fish, olive oil, beverages and wood will have a non-taxable minimum of USD 425 on the salary for the determination of employer contributions, instead of the $ 175 that is the general rule.
Lowering the impositions on wages goes in the right direction to recover favorable conditions for economic growth and employment. However, the reduction appears to be very limited in light of the depth and extent of the recession. In parallel, it goes against the goal of achieving fiscal balance. This explains a complex dilemma. The objective of balancing public accounts (essential to lower inflation and stop increasing public debt) prevents extending to all sectors and in greater depth the reduction of distortionary taxes that include not only employer contributions but also, among others, taxes on exports and sales.
What are the financial dimensions underlying the challenge of promoting growth and employment through reducing these distortionary taxes? According to data published by the Ministry of Finance for the year 2019 it is projected that:
These data show that the three main taxes that conspire against productive activities represent almost 13% of GDP. Therefore, it is impossible to reduce these taxes to stimulate investment, employment and exports without colliding with the zero fiscal deficit target. This dilemma is what business entities seem to ignore with their demands and from which the government can not find a way out. Certainly, distortionary taxes prevent getting out of the recession. But these taxes generate such an important amount of resources that they end up being essential for the strategy of reaching the fiscal balance.
Overcoming this trade-off is key to stop accumulating frustrations. For this goal, professionalism and political audacity are necessary in order to generate the fiscal spaces that allow reducing distortionary taxes in magnitudes more in line with the needs of the productive sectors. In this direction, the priority is to innovate in public management with special attention to the organization and administration of the tax system.
Specifically, according to the 2019 Budget, it is projected that about 7.8% of GDP will be collected with VAT. According to ECLAC estimates, considering the general rate at which the tax is applied and the value added of the economy, it is estimated that this effective collection is equivalent to approximately half of the potential collection of the tax. This means that, if evasion, elusion and legal maneuvers that taxpayers do to pay less VAT are reduced, another 7.8% of GDP could be collected as VAT. This is more than half of distortionary taxes.
The modernization of the VAT is an ambitious challenge, but possible and achievable in the short term. An important step is to redesign the monotributo (tax for small taxpayers), promoting its unification with the provincial sales taxes and municipal taxes and establishing rules that mitigate the incentives to taxpayers to remain spuriously in it to avoid VAT. The other strategic step is the massification of the electronic invoice and payments and moving to a unified determination of VAT, sales and municipal taxes from the tax authority. This implies eliminating the current scheme based on taxpayers’ affidavits. This change, in addition to raise tax collection, would reduce the administrative burden on taxpayers.