Argentina needs an income tax

Once again, the treatment of the budget was the subject of an unprofessional debate on income tax. On this occasion, another unsuccessful attempt was made to eliminate the exemption enjoyed by judicial employees and simultaneously –and in a very non-transparent manner– the exemptions in favor of truck drivers were extended.  Meanwhile, the debate on the enormous amount of exemptions in favor of certain entities and groups of workers and the serious design problems of the tax continue to be overlooked. 

A high degree of hypocrisy underlies the fierce resistance of the population to pay the so-called profit tax on personal income. On the one hand, the objective of moving towards a more egalitarian and inclusive society is very much vowed, especially among leaders. On the other hand, with the same emphasis, the main tax tool available to the State to contribute to a more progressive distribution of income is rejected. One factor contributing to this contradiction is the use of the term “profit” tax, when in fact it is an “income” tax. In fact, in the rest of the world the term “income tax” is used.

How much does personal income tax collect? According to information published by the OECD and CEPAL it is observed that:

• In Argentina it collects approximately 2% of GDP.
• In Uruguay it collects 4% of GDP, in Brazil 3% of GDP and in Chile 2% of GDP.
• In developed countries, personal income tax collects 8% of GDP on average. 

These data show that Argentina pays very little income tax. In countries with high social development, 4 times more is paid. Among neighboring countries, Uruguay pays 2 times more and Brazil pays 50% more than Argentina. In Chile, a country that is considered by most Argentinians as socially unjust, it is paid the same as in Argentina. This is very strong evidence of the blatant contradiction between what is claimed and what is practiced.

Argentina has, as a priority and urgent agenda, a comprehensive tax system reorganization. A key component is the taxation of people’s labor income, which is currently applied in a very arbitrary manner through different taxes. In the case of salaried employees, personal contributions are levied (14% of salary for ANSES and PAMI) up to AR$ 475 thousand and income tax is levied on salaries exceeding AR$330 thousand with rates that start at 5% and quickly reach the maximum of 35%. In the case of self-employed workers, the lowest income earners are benefited with the “Monotributo” which has a fixed fee that represents only 4% of the income and the highest income earners, in addition to social security contributions, pay income tax starting at a level of income of AR$95 thousand per month. The scheme is very distorting and unfair.

The solution is not to continue adding patches, but to unify all labor taxes into a single “personal income tax”. This tax should be applicable to the total amount of remunerations, with equal non-taxable minimums for all, and progressive rates that increase smoothly with the level of income in order to avoid “jumps” in the tax burden. No exemptions of any kind should be contemplated except for reimbursement of expenses associated with the activity being carried out. In order to be consistent, it must be clearly established that the same remuneration used to determine income tax will be used for social security and labor purposes. That is to say, if a tax exemption is regulated, the exempted part will not be considered for the calculation of the retirement benefits, nor severance payments.

Argentina will not get out of its decline by renewing continually the status quo. A comprehensive reorganization of the tax system based on the simplification and unification of taxes is urgent. Just as the federal VAT has to absorb the provincial sale taxes, internal taxes, and municipal taxes, the tax on labor income has to absorb personal social contributions and the current profit tax.