INCOME TAX HELPS REDUCE INEQUALITY

The Gini coefficient is the classic indicator used to measure income distribution. Its value ranges from 0 (maximum equality) to 1 (maximum inequality). So far this century, the maximum inequality reported by the INDEC was in 2003, after the mega-devaluation of 2002, with a Gini at 0.53. Then, with the great international bonanza, the population’s income increased and its distribution improved, reducing the Gini to 0.43 in 2011. As of 2012, it remained stable at a level of 0.43 inequality.

This trend –in itself worrying taking into consideration that, for example, in Europe, the Gini is 0.28– is broken in the 1st quarter of 2024 when the INDEC reports a significant increase in inequality. The Gini coefficient suddenly rose to 0.47. This jump is the highest observed in the last 30 years in one quarter. 

What factors explain such an increase in inequality? To answer the question, it must be held in mind that inflation between the 4th quarter of 2023 and the 1st quarter of 2024 was 63%. According to INDEC, in the same period, it is observed that:

• The incomes of middle-class households (top 20% of income) increased 63%, i.e., they had no loss in the face of price increases.
• Incomes of lower middle-class households (40% of the middle-income segment) grew 44% implying a real loss in the face of inflation of -12%.
• Incomes of poor or near-poor households (40% of lower income) grew 37% implying a real loss to inflation of -16%. 

These data show that inequality increased because lower-income households were less able to defend themselves against the acceleration of inflation. They receive some salary increases, but below the growth of prices. On the other hand, the incomes of middle-class households tend to keep up better with inflation. There are mechanisms in place, such as the wage bargaining agreements for formal wage earners, which allow them to defend their salaries better against inflation. The different adaptation to the inflation acceleration explains the increase in inequality.

The current tax system does not contribute to improving income distribution. An illustrative case is that of high-income earners. Social security contributions are deducted up to a certain ceiling ($ 2.3 million) and –because of the September 2023 reform– they only start paying income tax as from 15 minimum wages ($ 3.5 million). This means that someone who earns a minimum salary suffers a 17% discount on his remuneration, while someone who earns 15 minimum salaries suffers a discount of 11%. The same happens with more than 100 thousand retirees who are paid above the retirement ceiling ($1.4 million) and do not pay income tax either. Most public policy speeches are filled up with declamations about equality. In practice, legal provisions in favor of higher-income people abound. 

An important difference between Argentina and developed countries –which apply income taxes with greater intensity– is the quantity and quality of the services offered by the State. While in developed countries families enjoy high-quality public education, health, security and transportation systems, in Argentina middle-income families allocate a significant part of the family budget to pay for private schools, private medicine, private security and the maintenance of one or more private cars. This legitimizes the reluctance to pay income tax.

Resistance against the personal income tax is a selfish attitude that leads to burdening the most vulnerable population with greater sacrifices. The right path is to simplify and unify taxes by strengthening the income tax. It is also necessary to incorporate the principle of fiscal correspondence so that the provinces and their municipalities do not receive taxes from the co-participation but directly from the taxpayer. Thus, they will be held accountable leading them to improve public service quality.