Report Nº: 103627/09/2023
In modern countries, income tax is a central source of State revenue. In Argentina –with the support of the right, the left, and the center– the Congress is preparing to practically eliminate it. One more proof that the problem in Argentina is not the “rift” but the lack of professionalism and demagogy.
The lower house passed a bill introducing a new modification to the income tax, for the next year. Its guidelines deepen the changes imposed by the government for the current year. The main impact is that it significantly reduces the number of wage earners and retirees paying the tax. In practice, it implies that the tax will be applied only to self-employment and other sources of income, and practically disappears for employees and retirees.
The draft was conceived and promoted by the government within the framework of the electoral campaign and in an extremely fragile macroeconomic context, evidenced by the very high and growing inflation rate. Even so, there was broad and heterogeneous support in Congress. The legislators of the ruling party were joined by some members of the main opposition alliance, provincial parties, the libertarian party, and left-wing parties. Under the argument that “salary is not profit”, it was considered fair to eliminate it, even if this means exacerbating the very high inflation due to the higher monetary emission that the lowering of the tax will generate by defunding the State.
The question to be asked is who benefits from this change. According to INDEC for the 2nd quarter of 2023, there are some 9.6 million urban wage earners distributed as follows:
These data show that wage earners subject to income tax already constituted, before the change, a small elite within the labor market. More than a third of wage earners work in the informal sector, in most cases earning salaries below the poverty line. More than half of wage earners are formal but earn low wages in part because of the labor cost of social security contributions (non-progressive taxation). In this sense, the evidence is clear that lowering the tax burden for the remaining 10% of wage earners, who are the highest income earners, is extremely regressive.
All workers suffer from the low quality of public services. This increases the rejection of the high tax burden in the group that pays income tax. Unlike what happens in other countries, paying high taxes in Argentina does not avoid having to allocate part of the salary to pay a private health plan (which also applies coinsurance), private school, private security, private transportation, etc. Clearly, the quality of public services must be improved, but taxes should not be lowered for the 10% of the highest income earners at the cost of increasing inflation, making life more difficult for the remaining 90%.
The slogan “wages are not profit” is fallacious. Applying taxes on personal income with increasing rates is a good tool for the State to finance itself and improve income distribution. To move in this direction, it is necessary to unify all taxes on personal income. This implies unifying the personal social security contributions of salaried employees, the quota of low-income self-employed workers, the social security contribution of the self-employed, and the personal income tax. This tax should be a single regime applicable to all citizens equally, without exceptions or prerogatives. It must have a non-taxable minimum equal for all, so that even people with very low incomes are reached by the tax but paying zero. On top of the non-taxable minimum, low tax rates should be paid in the first brackets and higher later, so that the tax is progressive.
In Congress, it was once again demonstrated that the main problem in Argentina is not the “rift” but the majority support –without political party distinction– for bad policies. The main consequence is that the integral organization of the tax system is still pending. It is very clear that, in order to tackle it, much more professional, better prepared, and less demagogic public policy managers are needed.