21/07/2017 -
Edition 710

Taxes represent more than 100% of the profits in a shop

The decline and possible dismantling of an icon of illegal trade, “La Salada” market, is a very positive change. But for it to be sustainable, in addition to police action, there is the need of a reform in the tax system and the modernization of the state in order to make it more accessible to the general population. This is the only way people will be able to work and make a living in legal trade, and not relying on extortionists and criminals who profit from informality.

With a decisive police intervention “La Salada” leader was taken into custody. “La Salada” is an informal market that had begun as a marginal space to sell clothes for humble people, and ended up being a millionaire mega-emporium centered on tax evasion, the sale of counterfeit goods, extortion to informal sellers and corrupt political ties.  

Only with small differences, these illegal markets occur in other parts of the country. In many cases, they also include the invasion of the public space. “La Salada”, far from being an exception, is the archetype of an informal shopping mode widely extended along the country. So they are that these places happen to be informally called “Saladitas”.

Is the eradication of these criminal practices dependent only on police intervention? To find some evidence, looking at the World Bank’s Doing Business is very suggestive. This report measures, for many countries, the share of taxes on a business store’s normal profit. In the case of Argentina, it can be seen that:

  • Sales Tax represents 53% of profit.
  • Employers' contributions to social security represent 29% of profit.
  • Tax on financial transactions make 17% of profit.

These data shows that only these three taxes absorb all the profitability that a business store owner would expect to earn under normal conditions. This is, under the current tax system, only those who achieve a higher than normal profit could be able to pay taxes and generate a surplus. For those without a dominant market position that allows them to generate an extraordinary surplus, the only alternative is to operate in the informality.

Problems are not over if taxes are excluded. Bureaucracy also makes possible to run a small business only if it operates illegally. The same World Bank report shows that opening a business in Argentina takes 25 days, gaining a construction permit 1 year and the procedures to pay taxes consumes 45 days per year, when in advanced countries opening a business takes 1 day, obtaining the construction permit 1 month and the procedures to pay taxes consume only 7 days per year. 

Police action is not enough to end with the “Saladas”. It is essential to create friendlier regulatory environment and to establish a more rational tax system. As abusive and costly the conditions are in the “Saladas”, that they are less severe than the conditions imposed by the state`s rules.  Small entrepreneurs tolerate the economic and human costs of the informality because it’s even worse to operate under the protection of the state. This is why extortionists and criminals are able to make huge profits and are even able to corrupt the political power.

It is promising that the police dismantled these illegal places and has submitted its mentors to justice. But if the cost of working and selling in legality is not aggressively reduced, the dismantling of these informal markets will not be sustainable. The “Saladas” are the most explicit example of the need to modernize the state since this is the only way to reduce tax pressure, provide high quality state services and, thus, give people the option to work and progress in legality and honesty. 

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