TAXES ARE THE FIRST THING TO BE SIMPLIFIED

With the parallel dollar exceeding $1,400 and the gap with the official dollar in the order of 50%, the discussion about the need or not of a devaluation in the official exchange rate appears again. The government and many economists consider devaluation counterproductive because it generates inflation and population impoverishment. The correct path is to lower production costs so that the official exchange rate is competitive without needing devaluation.

An important factor imposing spurious costs on national production comes from the tax system. By eliminating taxes that make production spuriously expensive, competitiveness can be increased without resorting to devaluation. The government adheres to this diagnosis, but argues that –in order not to collide with the objective of fiscal balance– the elimination of bad taxes is subject to the economy growing and/or public spending decreasing.

To explore the consistency of the official approach, it is pertinent to analyze the composition of total tax collection. According to the Ministry of Economy, in the 1st semester of 2024, it is observed that:

• National and provincial tax pressure amounted to 28% of GDP.
• Through the four taxes that most erode competitiveness (export duties, PAIS, Check and sales tax) 8% of GDP is collected.
• This implies that to eliminate these four taxes and not lose revenue, GDP would have to increase by 40%. 

 

These data show that the proposal of waiting for the economy to grow in order to lower bad taxes is inconsistent. Sustained GDP growth of 7% over 5 years or 3.5% over 10 years would be needed to compensate for tax elimination with economic growth. This is too long and it is unlikely that production will grow at that rate with the current distortionary taxes in place. In other words, bad taxes must be eliminated for the economy to grow and not wait for GDP to grow before lowering bad taxes. 

It is also inconsistent to wait to lower public spending and then eliminate bad taxes. At the national level, public spending was reduced in the first half of the year by a quarter compared to the same period last year. It is necessary and possible to continue lowering national spending, but it will be a long and complex process. In the case of the provinces, the sale tax finances, on average, 20% of provincial primary public spending. Generating such a reduction in spending in the short term and in a sustainable manner is unfeasible in most provinces. In the provinces, more than half of public spending is allocated to public employee salaries in the State services of health, education, security, justice and social assistance.

The alternative path is for good taxes to absorb bad taxes. For example, national VAT, provincial sales tax and municipal taxes have in common that the three are imposed on sales. But VAT is a better-quality tax. Among other reasons –which explains why it is the most widely used sales tax in developed countries– is because it is much less damaging to competitiveness and easier to control. Providing that VAT absorbs sale and municipal taxes could simplify the tax system, increase compliance and improve competitiveness. Such a process is underway in Brazil to eliminate the very poor and overlapped sales taxes and replace them with a unified VAT.

The new Ministry of Deregulation and Transformation of the State has a crucial role to play: to promote the transformations that will avoid squandering the enormous effort that the population is making to stabilize the economy. An essential step is to eliminate distortionary taxes. This will not be achieved by waiting for the GDP to grow or for public spending to fall, but by ensuring that good taxes absorb bad taxes.