Tax exemptions are equivalent to the fiscal deficit

Judges and judicial employees are exempt from income tax. In the past, there have been several failed attempts to eliminate that exemption. Now, within the discussion of the 2023 budget, the ruling party and the opposition have agreed to eliminate it. The magistrates expressed their energetic rejection and the union of judicial employees have threatened with strikes and protests. 

Tax exemptions for certain groups of workers, organizations, sectors, and regions are commonplace in the Argentine tax system. They are listed in the draft budget 2023 and their cost is roughly estimated. They consist, on the one hand, of some 40 exemptions and reductions in IVA, income tax, fuel tax, consumer goods tax, personal property tax, check tax and social security taxes. On the other hand, 17 promotion schemes for the benefit of industrial activities, non-industrial activities, mining, forestry, biofuels, capital goods, auto parts, knowledge industry, naval, SMEs, and –the largest and most emblematic– Tierra del Fuego’s promotion scheme.

¿What is the fiscal cost of these exemptions? According to the draft budget, it is estimated that in 2022 the fiscal cost of the exemptions is as follows:

• The exemption for judges and judicial employees costs around 0.2% of GDP. 
• The rest of the exemptions have a fiscal cost of 2.5% of GDP.
• The primary fiscal deficit of the national public sector is projected at 2.8% of GDP.

These data show that the fiscal cost of the income tax exemption for judges and judicial employees is relevant. But much more important is the cost of the rest of the exemptions contemplated within the tax system. The most illustrative evidence is that, if this obscure instrument of public resources allocation were eliminated, the primary fiscal deficit could be practically eliminated.

In the context of a very onerous tax system, both in terms of bureaucratic burden and tax pressure, mechanisms that make it possible to avoid all or part of this burden gain legitimacy. But, far from being a solution, they aggravate the problems, since the relief for the beneficiaries is at the cost of a greater burden for the rest of society. The underlying issue is that the three levels of government (nation, provinces, and municipalities) apply similar taxes to the same people for the same taxable events. A sale is taxed, at a minimum, with IVA by the federal government, with gross income by the provinces, and with taxes by the municipalities. A real estate property or a car is taxed with personal property tax at the national level and with provincial and municipal property taxes. Under this disorder, demands and sectorial pressures for special treatments are naturally exacerbated in order to get rid of part of this high tax pressure. This occurs at the national level, but there is also a proliferation of differential treatments in provincial and municipal taxes.

Eliminating exemptions –i.e. that all taxpayers pay the corresponding taxes– does not imply ceasing to implement promotion or support policies. To the extent that they are justified, they can continue to be implemented but establishing direct subsidies with a specific budget line. In this way, the fiscal cost of promotion is made explicit, which must be contrasted with the expected social benefits. While the tax exemption operates as a disguised transfer of public funds, the direct subsidy is more explicit and transparent.

In any case, the main challenge is to organize the tax system by focusing on the unification of taxes. For example, tending towards a single sales tax by making IVA absorb provincial and municipal sales taxes. The same with property taxes, unifying personal property with provincial and municipal taxes applied to real estate and automobiles. As part of this simplification, exemptions should be replaced by explicit subsidies, when justified.