TO AVOID DEVALUATION PROVINCIAL SALES TAXE SHOULD BE ELIMINATED

In Brazil, there are three overlapping sales taxes. The national VAT on value-added, the state (provincial) ICMS, which is mixed –since it taxes the value added in the purchase of physical inputs but the invoicing in the purchase of energy and inputs for administrative services and outsourcing– and the municipal ISS, which operates as a tax on the invoicing of services. This extremely complex and distorting scheme is in the process of unification into a VAT with two components: one federal and one subnational.     

Argentina suffers the same problem. Provincial sales taxe and municipal Industry and Commerce taxes are superimposed on the national VAT. Although the negative consequences are similar to those in Brazil, so far unification is not on the agenda. Since Brazil, the main trading partner, is on the way to solving the problem, there are good reasons to address the challenge of correcting the same distortion in Argentina. 

One of the reasons that generates opposition to unification is that VAT collects 7.8% of GDP and provincial sales tax 4.3%. Therefore, between both taxes 12.1% of GDP is collected, not counting municipal taxes. How challenging is it to reach this level of collection with VAT? According to the OECD among the countries that collect the most VAT are:

• Hungary with a general rate of 27% collects 9.5% of GDP.
• Denmark with a general VAT rate of 25% collects 9.3% of GDP.
• Finland with a general VAT rate of 24% collects 9.2% of GDP. 

 

These data show that in order to achieve a collection similar to the one currently generated between VAT, sales and municipal taxes (more than 12% of GDP), it would be necessary to raise the VAT rate above that of the countries that collect the most from this tax. The same problem arises in Brazil whereby it is the main reason for controversy in the reform process. Specifically, it is questioned that because of the unification Brazil will become the country with the highest general VAT rate in the world. 

This is a mistaken argument, both for Brazil and Argentina. Unification does not increase the tax burden. It simply makes it more explicit. More than 12% of the GDP collected through VAT, sales and municipal taxes are included in Argentina’s production costs. Although they are not perceived and people are not aware of their existence, families bear the tax burden by paying higher prices for goods and services. Worse still, when someone exports, the costs of their inputs include sale and municipal taxes which, unlike VAT, are not reimbursed. It is very paradoxical that in such a competitive world Argentina “exports” bad taxes.

The main advantage of the unification is the elimination of sales and municipal taxes. These taxes, and especially their regimes of payment on advance, are extremely rudimentary. They are so primitive requiring very high administrative and legal costs. For these same reasons, they are much more permeable to evasion and discretionality. In addition, they distort the organization of production and commercialization. These are not taxes possible to be improved. As the Brazilian reform assumes, the only solution is their elimination and the only way to do it is through absorption by VAT.

An additional advantage of VAT unification is that it explicits that collecting more than 12% of GDP with sales taxes is disproportionate. Giving visibility to the problem will add pressure to move faster in the organization of public spending and the collection of other less distorting taxes. The fact that Brazil, the closest competitor of Argentina, started the unification process increases the urgency. Otherwise, the pressures for devaluation to compensate for the distortions generated by bad taxes will increase.