IMPROVING COMPETITIVENESS WITHOUT REDUCING TAXES

The official exchange rate tends to the floor of the exchange rate band ($1,000) instead of the ceiling ($1,400). From the point of view of the objective of minimizing the inflationary impact of the exchange rate flexibility, this is good news. From the point of view of domestic production at this exchange rate level, competitiveness problems remain. That is to say, the difficulties faced in exporting and competing with imported products persist. 

This conflict of objectives leads to a conflict of public policies. On the one hand, business chambers ask for lower taxes to improve competitiveness. On the other hand, the government states that there is little room for lowering taxes without compromising the fiscal balance. In a short-term perspective, the positions are irreconcilable. As a result, they generate exhausting controversies. 

In order to find an alternative, it may be useful to identify those taxes that make an important contribution to the State’s revenues and at the same time destroy national competitiveness. In this sense, according to data from the Ministry of Economy for 2024, it is observed that:

• At the national level, the check tax collected 1.6% of GDP and export duties 1.0% of GDP.
• At the provincial level, the sales tax collected 4.2% of GDP and the stamp tax 0.4%.
• At the municipal level, the industry and commerce tax collected 0.8% of GDP.

These data show that the main distortionary taxes generate revenues equivalent to 8% of GDP. This implies almost 30% of the total resources available to the national, provincial and municipal public sector. This confirms that there is no possibility of eliminating or reducing these distortionary taxes without falling back into a fiscal deficit. 

However, these taxes are lethal for competitiveness. To illustrate their negative impact, it is useful to compare them with VAT. In the case of an exported product, VAT can be identified and reimbursed to the producer so that the price of the product on the foreign market does not include it. In the case of checks, sales, stamps and municipal taxes are included in the production costs. They cannot be identified and therefore cannot be reimbursed. These taxes make Argentinean products entering other countries more expensive, putting them at a commercial disadvantage. It is difficult for national production to penetrate other countries competing with local products or products from third countries that do not have the Argentine distorting taxes. 

A similar process occurs with an imported product. VAT is imposed with the same intensity on domestic and imported goods. But an imported product pays fewer checks, sales, stamps and municipal taxes because it has fewer intermediate stages in the production chain before reaching the final consumer. In other words, because of distorting taxes, imported products have an advantage over domestic products. 

VAT is a neutral tax from the point of view of competitiveness. It does not add to the price of exported products and taxes domestic and imported products with equal intensity. On the contrary, distorting taxes –check, sales, stamps, municipal taxes– have a negative impact on competitiveness. Either because they make sales abroad more expensive (taxes are “exported”) or because they tax domestic products more heavily than the same imported product. 

If neutral taxes, such as VAT, replace distortionary taxes, competitiveness can be improved without losing revenue. For example, by establishing a “super VAT” to absorb sales, stamps and municipal taxes. In this way, it would be possible, on the one hand, to stop “exporting taxes” and, on the other, to stop domestic production facing higher tax burden compared to the same imported products.