BAD TAXES MUST BE REPLACED BY GOOD TAXES

The reversion of the public finances is extraordinary. In the first 7 months of the year 2023, the financial deficit of the national State was AR$4 billion, while in the same period of 2024, it reversed to a surplus of AR$2 billion at current prices. This was achieved exclusively due to a decrease in public spending (a 28% real reduction), since revenues increased less than inflation (a 5% real drop).

In this scenario and given the political difficulties in Congress to extend the PAIS tax at the end of the year, the government decided to start eliminating it. This is a very distorting tax levied on the purchase of official dollars for savings, tourism abroad and imports. The other tax on foreign trade –as distorting as the PAIS tax– is the export duty, the elimination of which was also emphatically and repeatedly promised by the government. 

The question to be asked is what is the fiscal impact of eliminating the PAIS tax and export duties? According to data from the Ministry of Economy for the period January-July 2024, it is observed that:

• PAIS tax revenue was about AR$4.3 billion.
• Export duties collected about AR$3.3 billion.
• Between both taxes –the PAIS tax and export duties– AR$7.6 billion were received by the State, which represents the total reversion of the deficit to fiscal surplus. 

These data show that the abrupt improvement in public financess was achieved thanks to a sharp reduction in public spending, but also to the contribution of these two highly distorting taxes. In fact, without these taxes, the fiscal deficit would have remained the same.  In the short term, the elimination of the PAIS tax will surely be compensated by the fiscal package approved by Congress (income tax for high-income earners, personal property tax relief, moratorium) and the recovery of economic activity. But this compensation is unlikely to be enough to eliminate export duties. Much less room is still left to reduce other distortionary taxes such as the check tax and even more complicated ones as provincial sale taxes and municipal taxes.

After a strong reduction in public spending, it is feasible to continue reducing it, but at a slower pace. The increase in tax collection due to the recovery of economic activity may also generate space for tax reductions. But even in the most optimistic scenario, the margins for reducing distortionary taxes remain limited. Therefore, given that the sustainability of the fiscal surplus is essential and that it is also a priority and an urgency to eliminate bad taxes, it is advisable to look for another tax strategy. 

The alternative is to rethink the organization of the tax system under the logic that the best taxes replace the worst taxes. This is what Brazil is doing, establishing that the VAT (with an increased rate) absorbs other sales taxes. The parallel with Argentina would be for the VAT to absorb the other two bad sales taxes, which are provincial and municipal sales taxes. In the same way, the reduction of export duties can be fiscally compensated by higher revenues through income and personal property taxes.

Tax regulation does not depend only on the national level. It requires an agreement between the national government and most of the provinces (not all of them). In order to implement it, a pact of coordination of tax competencies and responsibilities in the provision of public goods is needed. Such an agreement –approved by a law of the National Congress and provincial laws adhering to it– is the way to establish a friendlier tax and public management system for the economy within a framework of respectful reconfiguration of the federalism.