3 OF THE 5 MAIN TAXES MUST BE ELIMINATED

The Argentine tax system is extremely intricate. The main reason is that the three levels of government (national, provincial, and municipal) levy their own taxes on citizens in an overlapping and uncoordinated manner. One consequence is that there are more than 150 taxes with very different revenue levels. Given that a handful of taxes generate most of the total revenues, the government’s approach is to simplify the system by eliminating the remaining taxes that contribute very little in terms of revenue. 

It is estimated that in 2024 the total tax burden, adding national and provincial taxes and excluding social security contributions, amounted to 20% of GDP.  The four main national taxes, namely VAT, Income Tax, Check Tax and Export Duties, stand out for their volume. Additionally, there is the main tax of the provinces which is the Sales Tax. These 5 taxes account for 87% of the total tax burden. 

According to the Ministry of Economy, it is observed that these 5 main taxes have the following characteristics:

• VAT and Income Tax explain 54% of the total tax pressure and are distributed by co-participation approximately half for the Nation and half for the provinces.
• Check Tax and Export Duties collect 12% of the total tax burden and finance only the nation.
• Sales Taxe collects 21% of the total tax burden and finances the provinces.

These data show that the problem is not only the big number of taxes, but that 3 of the 5 main taxes are extremely distorting. Check, Export Duties and Sales tax generate a third of the total tax burden and it is essential to eliminate them to preserve the economy’s competitiveness. Consequently, the simplification of the tax system involves not only eliminating the excess of taxes but fundamentally ordering the 5 taxes that collect the most. The most challenging task is to eliminate the 3 most distorting taxes (Check, Export Duties and Sales tax) and to establish a consistent distribution scheme among levels of government and among the provinces. This implies that the tax reform must necessarily go hand in hand with the rethinking of the co-participation regime. 

One way to unravel this mess is to establish that all VAT should go to the provinces and all the income tax to the nation. This change is quite neutral because what the nation ceases to receive from VAT is almost equivalent to the portion of Income tax that the provinces cease to receive. In this way, the space is opened for the Nation to eliminate Check Tax and Export Duties. A central accompanying element of this change is that the nation must give up any overlapping spending with the provinces, i.e., spending on intra-provincial and municipal infrastructure and provincial social services. This is something that the government began reducing non-automatic transfers to the provinces.

Another key component of the reform is for VAT absorbing Sales Tax and municipal taxes creating a “super VAT” which must be distributed among the provinces according to the same criteria currently used to distribute the Sales Tax. That is, for sales made within each province, 100% of the “super VAT” remains in the province and for interprovincial sales, 50% is distributed in the province of origin and 50% in the province of destination. 

The starting point for the implementation of this scheme is the signing of a Fiscal Coordination Agreement that orders the distribution of functions between levels of government and the distribution of taxing powers. The agreement does not require the unanimous support of all provinces. A majority is enough. For the most backward provinces, whose “super VAT” tax base may be –at the beginning– insufficient to compensate for what they currently receive by co-participation, a Convergence Fund must be foreseen to make up the difference. But conditioned to a fiscal reorganization plan and a development strategy.