TAX EXEMPTION ARE A DERIVED OF THE TAX DISORDER

Before the elections, the government made aggressive tax cuts and spending increases. Before these measures, the 2024 draft budget already estimated that 2023 would close with a primary fiscal deficit of -2.4% of GDP. Therefore, to maintain this projection, it will be necessary to deepen the inflationary adjustment, i.e., to let inflation reduce real expenses, particularly pensions. Thus, the inflationary adjustment will make it possible to show that public finances are not out of control at the cost of higher social costs.

But by 2024, inflation is expected to fall. Consistent with this, a reduction of the deficit to -0.9% of GDP was budgeted for next year. Later, probably to show a reaction to the soaring inflation, the targets were revised and now a surplus of 1% of GDP is proposed. To achieve this goal, Congress was asked to speed up the discussion of a “separate bill” presenting tax exemptions that, historically, had never been identified. The official proposal is that by eliminating these special tax exemptions it is feasible to achieve the average fiscal surplus.

How much is the “tax expenditure”, i.e., the loss of tax resources due to tax exemptions? According to information published by the Ministry of Economy, it is observed that:

• In the last 20 years tax expenditure oscillated around 2.9% of GDP.
• In the draft budget 2024 it was estimated that they would reach 2.3% of GDP.
• In the separate part of the budget, new exemptions are listed –which have never been accounted for in tax expenditure– for the equivalent of another 2.4% of GDP.  

These data show the high level of improvisation and opportunism prevailing in the design and administration of public policy. In front of an uncontrolled inflationary process, derived from the deepening of chronic fiscal imbalances, a primary surplus of 1% of GDP is announced. To reach the goal, it is proposed to eliminate special tax treatments, many of which were never recorded in the public accounts. The improvisation reaches at the level that, of the 15 items presented in the offprint as new tax expenditures, 8 are not estimated in their costs (they appear “without data”). The tax expenditures also do not include the exemption of salaried employees from income tax and the refund of VAT on the basic food basket established after the PASO searching for votes in the presidential election.

Anarchy, arbitrariness, and lack of transparency prevail in tax expenditures. Its genesis is closely associated with the disorder of the State. It is true that in some cases they are mere privileges obtained by powerful sectors. The best-known example is the exemption from income tax enjoyed by the judiciary. But, in many cases, they operate as compensation, at least partially, for the consequences of bad public policies. For example, in front of the discrimination caused by agricultural withholding taxes, appears the exemption of farms from personal property tax. The result is an accumulation of tax distortions.

As in the past, the proposal to eliminate tax expenditures will surely not materialize. The reason is that it is not feasible without an integral organization of the tax system. The objective should be to establish a simple and homogeneous tax system for all taxpayers. If, due to market anomalies or equity reasons, a special treatment for a region, sector, service, or product is justified, the best tool is a direct subsidy, making explicit the expenses incurred by the State, and not a tax exemption. This generates a framework of greater transparency and certainty of fiscal costs. In addition, it facilitates the evaluation of its impacts to assess the convenience of maintaining it or activating other policy instruments.

The government’s proposal to ask Congress to eliminate tax privileges is opportunistic. It serves as a reaction to the acceleration of inflation, but it is very unlikely that this will generate savings of the magnitude needed to balance the public finances. It would be much more honest and conducive to propose a comprehensive reorganization of the State, where one of the most important components is to simplify the tax system. Within this framework, it is feasible to eliminate special tax treatments and establish direct subsidies when reasons are legitimizing them.