Tax collection could be doubled without raising rates - IDESA

Report Nº: 79527/02/2019

Tax collection could be doubled without raising rates

Only half of the potential resources are collected with VAT. Therefore, instead of continuing to increase taxes that discourage production and employment, efforts should be concentrated on better VAT administration. To this end, a profound transformation of the tax administration is unavoidable. One of the taxes most recommended by the theory of public finance and […]

One of the taxes most recommended by the theory of public finance and used by advanced countries is the Value Added Tax (VAT). Its main virtue is neutrality. That is, since it is applied to the added value it does not affect decisions in the allocation of the productive resources. Unlike taxes on labour, which discourage formal employment, taxes on bank transactions, which discourages bank transactions and increases the interest rate, or on energy, which makes the use of energy in the production process more expensive, VAT does not “punish” any particular factor of production.

Like any consumption tax, its main weakness is the negative impacts derived from its application on basic goods, such as food and medicine, or desired goods, such as books and culture. But this can be remedied by providing mechanisms to reimburse the VAT to vulnerable populations and consumers of desired goods. With the massification of electronic payments, the refund of VAT is relatively easy to implement.

In Argentina, VAT is applied with a high general rate (21%) and generates 30% of the tax collection. Is this level of collection reasonable? A recent ECLAC study “Rethinking institutions for development” sheds light on the question. According to this source, it can be observed that in Argentina:

  • Only 46% of what could potentially be collected with VAT is collected.
  • 7% of the potential collection is lost due to fiscal benefits granted in the VAT.
  • For evasion, elusion or aggressive fiscal planning of taxpayers, 47% of the potential collection is lost.

These data show that depending on the added value of the economy and the general tax rate applied, the tax authorities collect less than half of the potential revenue. A part of the collection is lost due to tax benefits granted by the rules (rate reductions, exemptions, zero rates and other deductions). But most losses are explained by evasion (buying and selling without an invoice), circumvention (using special regimes to avoid being taxed with VAT) or aggressive taxpayer planning (exploiting ambiguities generated by legal loopholes to pay less). In other words, if everyone would pay the tax, the collection of VAT could be doubled without increasing the tax rate.

The consequences of poor management in the VAT collection are very serious. Beyond the ethical considerations emerging from massive non-compliance, from an economic and social point of view the most harmful thing is that what is not collected with VAT due to negligence or disdain is replaced with very bad taxes. Among them, the inflationary tax, taxes on employment, to bank transactions, to energy, to exports, etc. An example in this regard is the strategy adopted to reach the zero deficit target in 2019. Tax on exports were surged to obtain USD 11 billion when by reducing by a third the losses generated by the deficient administration of VAT, it would be enough to collect the same amount.

Reducing the gap between effective and potential collection of VAT is a strategic objective. To this end, it is essential to simplify regulations and modernize the tax administration. A key step in this process is the universalization of electronic invoices and payments. Under these conditions, it is possible that the taxpayer does not continue to determine the tax through an affidavit, but rather the tax authorities determine the amount to be paid based on purchases and sales information.

To maximize the positive impacts of this change, the determination of VAT should go hand in hand with the determination of provincial sales tax and municipal taxes. This would simplify and make feasible the reduction of rates in local taxes. The idea is to replicate the experience carried out in the Cordoba province with the Unified Tax for small taxpayer through which national, provincial and municipal taxes were merged into a single tax.


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