THE “SUPER VAT” IS VIABLE IN ALL PROVINCES

Inflation is reduced, and expectations are heightened that the process will be accompanied by sustained growth in production, employment, and wages. To make them real, structural reforms correcting severe competitiveness deficits are vital. One essential reform is in the tax system. Within this, the most important is to replace the provincial and municipal sales taxes. The solution is to replace them with a “Super VAT,” which becomes the main source of financing for the provinces and their municipalities. 

Among the difficulties for its implementation is the heterogeneous level of development among provinces. In principle, there would be at least eight provinces (CABA, Buenos Aires, Chubut, Córdoba, Mendoza, Neuquén, Santa Cruz, and Santa Fe) that, due to their economic activity vitality, could self-finance using the “Super VAT” as their main source of financing. However, the remaining 16 provinces could face difficulties because, due to their lower level of development, they would have to apply a “Super VAT” with very high rates. Extreme cases occur in some northern provinces where extravagant rates would be required due to their reduced tax base. 

To address the problem and design solutions, it is advisable to assess the obstacles posed by these 16 provinces. According to data from the Ministry of Economy, it can be observed that:

• They represent 20% of the country’s total GDP.
• 31% of the total population. 
• 22% of poor urban households.

These data show that, although there are many provinces where the implementation of the “Super VAT” could cause difficulties due to their low generation of added value, from the point of view of production, population, and poverty, their dimensions are small. Therefore, it is feasible to adopt a fiscal correspondence scheme as a general rule. That is, each province tends to finance itself with the taxes it collects from its inhabitants, taking the “Super VAT” as its main source of income. For provinces with economic weakness, a Leveling Fund is quite feasible to guarantee them the same fiscal income they have today. 

Tentative and preliminary calculations estimate that no more than 1.5% of GDP would be needed for this Equalization Fund. This implies a volume of resources equivalent to one-fifth of what is currently distributed through coparticipation. In other words, full and immediate fiscal correspondence is feasible in approximately 80% of the country. For the rest, made up of many provinces with small economies and demography, fiscal correspondence is also feasible, accompanied by the Levelling Fund as a mechanism for regional redistribution of income to compensate for the lower tax capacity of their population. 

The important thing is that the Levelling Fund to guarantee the most disadvantaged provinces the same level of income they currently have is much smaller than the current redistribution among all provinces through coparticipation. In addition, the other difference with coparticipation is that transfers from the Levelling Fund may be conditional on certain fiscal responsibility targets and a development plan aimed at reducing the enormous and unjustified economic and social gaps that currently exist between the Argentine provinces. 

Success in reducing inflation increases the urgency of creating conditions to improve competitiveness. Failing to do so jeopardizes many urban activities that export and compete with imports that generate a large part of employment. A crucial step in continuing these achievements is to replace provincial and municipal sales taxes. The provinces cannot do this on their own. At most, they can reduce their rates, which provides very limited relief to domestic competitiveness. The “super VAT” will allow replacing both taxes and generating fiscal correspondence not only in the most developed provinces but also in the most backward ones.