Informe Nº: 20/07/2017
The Argentinean Sales Tax is a factor of decadence. But it has political appeal because the population is not aware of its burden and is very easy to collect it since most of its revenues are raised in advance through a complex system of withholds executed by the same tax payers. The Court’s pronouncements against the Sales Tax and the expiration of the Financial Transactions Tax are a good opportunity to create a unique VAT that absorbs the Sales Tax.
The Supreme Court has repeatedly ruled against the widespread practice of applying higher Sales Tax rates to manufacturing industries settled outside provincial territory. This is a decision with great impact, especially for the larger provinces where these “internal customs” are an important source of revenue.
The Court judgment’s occurs in the context of an intense and widespread growth of public spending. In the case of the provinces, according to data form the Ministry of Economy, expenditure increased from just over 10% of the Gross Domestic Product (GDP) at the beginning of the 1990s to more than 17% of the GDP in 2015. The expansion was particularly intense after 2003.
The increase in public spending was not only without any order and with little strategic sense. It was associated with a strong increase in the tax burden based on the application of very bad taxes. The case of the Sales Tax serves as an illustration. According to data from the Ministry of Economy, it can be seen that:
This data shows that the growth in the collection of the Sales Tax has doubled GDP growth in the last two decades. As it happened with public spending, the increase was very intense from 2003 onwards, with acceleration since 2011 when international commodity prices faded and the provinces begin to increase their own sources of income, as a way to preserve their autonomy in the context of a strong concentration of fiscal resources in the Federal Government.
The Sales Tax is a rudimentary and highly distortive tax. It entails a “cascade” effect, in the sense that it is multiplied through the different links that make up the productive chain. From the political point of view, however, it is very attractive because it gives financial autonomy to the provinces, without the public perception of its negative impact on life quality. Few citizens are aware that, in most of the goods they buy, they pay more than 10% of taxes due to the accumulation of the Sales Tax in the different stages of production.
Also, it’s a tax that requires very little administrative effort by the taxmen. About three quarters of the revenue is generated by a complex system of withholds among tax payers. The counterpart is a huge administrative burden for the tax payers, aggravated by the different rules applied by each province. Moreover the retentions mean not only that the tax is collected without efforts but it is a collected in advance. In many cases, significant balances are accumulated in favor of taxpayers. Thus the paradox is that the more inefficient is the tax’s administration, the more it collects because taxpayers have no way to stop the growth of the balances in their favor.
The Court’s ruling against the Sales Tax and the imminent expiration of the Financial Transaction’s Tax, another highly distortive tax, give the opportunity to move forward towards a tax scheme that is more equitable and less aggressive to investment. The Sales Tax should be absorbed by the VAT, and the Financial Transaction’s Tax should operate as payment in advance of the VAT. In order to reduce the increase of the VAT, exemptions and different rates should be eliminated and VAT refunds should only be given to people in situations of social vulnerability.
