9 out of 10 workers are not reached by the income tax

Between one-fourth and one-third of formal employees pay the income tax. But taking into consideration the workers in the informal segment of the labour market, who generally perceive low wages, the impact of the income tax is reduced to only 10% of the total workforce. In this context, by trying to downsize the incidence of the income tax without first reducing unproductive government expenditure -like the one which is being proposed by the opposition- is a regressive change in the tax system since it necessarily leads to an increase in the burden of other anti-poor taxes, such as the inflation tax, that relies heavily in the budget of the poor households.

The negative to update the parameters to calculate the income tax has led to an increase in the number of workers reached by the tax and the amount paid by those already reached. In response, many initiatives have flourished proposing the reduction of the incidence of this misaligned income tax. In order to compensate for the reduction in the tax revenues that will come out of the reduction of burden in the income tax, a removal of the current income tax exemption enjoyed by financial yields is proposed.

The proposal to end the income tax exemption on financial yields sounds politically attractive, but it lacks financial consistency. The financial income exemptions reach the yields gained by savings accounts and fixed term deposits, government bonds, and the shares and securities traded in the stock market. The revenues lost amounts to, according to the Ministry of Economy, $ 5,270 million. This is only 4% of the total revenues collected by the income tax. While tax equity considerations could recommend stopping these exemptions, under no circumstances they are of sufficient magnitude to offset the income tax reduction.

The proposal of reducing the workers income tax should also be evaluated from the point of view of distributional equity. Data from the INDEC household survey for the 1st quarter of 2013 shows that:

·  The average wage considering all occupied workers (formal and informal employees and all self-employed) is of $ 4,232 per month.

·  90% of workers receive a salary below $ 8,000 per month.

·  The remaining 10% have wages higher than $ 8,000 per month

Since approximately $ 8,000 is the threshold to pay the income tax, the data shows that the tax affects only 10% of workers. In contrast, 9 out of 10 workers perceive an income below the threshold where the income tax begins to be paid. This means that, by decreasing the incidence of the workers’ income tax, the personal income distribution will become increasingly regressive. This conclusion is even stronger when retirees are included in the analysis, since three-fourths receive the minimum pension ($2,165).

An $8,000 salary is not high, but barely provides a reasonable standard of living.  The point is that the deterioration of the wage level that prevails in the labor market is so vast that just surpassing this modest remuneration is enough to be among the 10% of workers with the highest incomes. This happens because the base of the wage pyramid consists of a high proportion of informal workers (almost half) which receive very low wages.

The unprecedented tax burden increase of the past decade relies exclusively on taxes that affect the lowest income families. The most important are the value-added tax, the gross-income tax, social security taxes and the inflation tax. These taxes have the particularity, unlike the income tax, of not being explicit. This is why the reduction of the income tax, which is perceived by the worker on its paycheck, is a politically attractive idea. But if done without first reducing unproductive public spending –as it was announced with the half-bonus grant and is being proposed by most of opposing parties– necessarily leads to an increase in the incidence of other taxes. Thus, a progressive tax (income-tax) is proposed to be replaced by a much more regressive tax (e.g., the inflation tax). From the point of view of distributional equity, a more regressive alternative is hard to be imagined.

Instead of feeding a pointless and hypocritical debate about the income tax, the focus should be on the improvement of the state management. With sound public expenditure and better regulations, a sustained investment process, that would raise the wages among the low paid, could begin inducing a sustained process of social prosperity.