THE PARALLEL DOLLAR DOES NOT RICE, IT ACCOMPANIES INFLATION

Once again, the parallel dollar is a cause of concern. The government reacted boldly by announcing that it will intervene in the parallel dollar market to suck pesos out of the market. For this strategy to succeed, it is essential to accelerate the implementation of the structural reforms included in the May Act.         (more…)

TAXES ARE THE FIRST THING TO BE SIMPLIFIED

The Ministry of Deregulation and the State Transformation was created with the objective of simplifying State interventions. One priority transformation is taxation. The way is doing good taxes to absorb bad taxes so that the resulting increase in competitiveness will make the economy grow again.        

With the parallel dollar exceeding $1,400 and the gap with the official dollar in the order of 50%, the discussion about the need or not of a devaluation in the official exchange rate appears again. The government and many economists consider devaluation counterproductive because it generates inflation and population impoverishment. The correct path is to lower production costs so that the official exchange rate is competitive without needing devaluation.

An important factor imposing spurious costs on national production comes from the tax system. By eliminating taxes that make production spuriously expensive, competitiveness can be increased without resorting to devaluation. The government adheres to this diagnosis, but argues that –in order not to collide with the objective of fiscal balance– the elimination of bad taxes is subject to the economy growing and/or public spending decreasing.

To explore the consistency of the official approach, it is pertinent to analyze the composition of total tax collection. According to the Ministry of Economy, in the 1st semester of 2024, it is observed that:

• National and provincial tax pressure amounted to 28% of GDP.
• Through the four taxes that most erode competitiveness (export duties, PAIS, Check and sales tax) 8% of GDP is collected.
• This implies that to eliminate these four taxes and not lose revenue, GDP would have to increase by 40%. 

These data show that the proposal of waiting for the economy to grow in order to lower bad taxes is inconsistent. Sustained GDP growth of 7% over 5 years or 3.5% over 10 years would be needed to compensate for tax elimination with economic growth. This is too long and it is unlikely that production will grow at that rate with the current distortionary taxes in place. In other words, bad taxes must be eliminated for the economy to grow and not wait for GDP to grow before lowering bad taxes. 

It is also inconsistent to wait to lower public spending and then eliminate bad taxes. At the national level, public spending was reduced in the first half of the year by a quarter compared to the same period last year. It is necessary and possible to continue lowering national spending, but it will be a long and complex process. In the case of the provinces, the sale tax finances, on average, 20% of provincial primary public spending. Generating such a reduction in spending in the short term and in a sustainable manner is unfeasible in most provinces. In the provinces, more than half of public spending is allocated to public employee salaries in the State services of health, education, security, justice and social assistance.

The alternative path is for good taxes to absorb bad taxes. For example, national VAT, provincial sales tax and municipal taxes have in common that the three are imposed on sales. But VAT is a better-quality tax. Among other reasons –which explains why it is the most widely used sales tax in developed countries– is because it is much less damaging to competitiveness and easier to control. Providing that VAT absorbs sale and municipal taxes could simplify the tax system, increase compliance and improve competitiveness. Such a process is underway in Brazil to eliminate the very poor and overlapped sales taxes and replace them with a unified VAT.

The new Ministry of Deregulation and Transformation of the State has a crucial role to play: to promote the transformations that will avoid squandering the enormous effort that the population is making to stabilize the economy. An essential step is to eliminate distortionary taxes. This will not be achieved by waiting for the GDP to grow or for public spending to fall, but by ensuring that good taxes absorb bad taxes.

INCOME TAX HELPS REDUCE INEQUALITY

The INDEC reported a sharp increase in inequality. At the same time, Congress approved the reinstatement of the income tax, rectifying the opportunistic reform of September 2023. The law is relevant, but a more comprehensive tax system reform, such as the one proposed in the May Act, is still pending.         (more…)

BAD TAXES MUST BE ELIMINATED WITHOUT WAITING FOR CUTS IN FISCAL SPENDING

The financial surplus has been achieved thanks to a strong reduction in public spending. But an important role is also played by the growth of tax collection driven by very bad taxes. This alerts on the importance and urgency of tax reform foreseen in the May Pact. (more…)

IT IS NOT NECESSARY TO VETO THE PENSION LAW BUT TO IMPLEMENT IT PROPERLY

With the argument of protecting the fiscal surplus, President Milei threatens to veto the bill that modifies the pension indexing rule. However, the bill protects the public accounts more than the government’s DNU. Therefore, in order to make the fiscal balance sustainable, the best alternative is to implement the law properly.   (more…)

HANDING OUT GOODS IS THE WORST PRACTICE OF CLIENTELISM

Delays in the distribution of foodstuffs are causing intense controversy. This is not an isolated case, since the distribution of goods by the national government is a common practice. The solution is to eliminate the intervention of federal officials in areas that are the responsibility of the provinces and their municipalities.    (more…)

THE PRIORITY IS THE REFORMS OF THE MAY PACT

The exchange rate appreciation and the special regimes for new investments provided for in the Law of Bases are a source of controversy. Without ignoring the risks of a cheap dollar and the need to attract investments, the most important challenge lies in the changes proposed by the May Pact agenda.         (more…)

WAGES LOST A QUARTER OF THEIR REAL VALUE IN 6 YEARS

The CGT declared two general strikes against the new government. The fall in real wages has deepened in recent months, but the fall has come on for a long time. Real wages will not recover by questioning the ideas promoted by the government, but by deploying more technical and political capacity to implement them.         (more…)

IT IS THE REFORMS THAT MUST BE ACCELERATED, INSTEAD OF DEVALUATION

President Milei questioned those who advocate accelerating the pace of devaluation of the official dollar. He argues that the dollar is not cheap, but Argentina´s internal costs are high due to the distortions of the economy. Therefore, what must be accelerated are the transformations proposed in the May Pact.         (more…)

UNIVERSITIES NEED ORDERING, NOT ADJUSTING

The massive university protest put the discussion of the university budget on the agenda. Just when the government celebrates the fiscal surplus. Faced with chronic problems of underfunding and mismanagement, the solution is not to adjust but to improve the organization of the State, in this case, that of the universities.  (more…)