Report Nº: 28/01/2022
A new suspension of the provincial tax cuts accorded in the 2017 Fiscal Consensus was signed. The strategy of gradual reduction of distortive taxes and the rethinking of the provincial sale tax has failed. The permanent and definitive change should be the federal VAT absorbing the provincial sale tax.
The agreement between the federal and most of the provincial governments suspending the gradual distortionary tax reduction schedule accorded in the 2017 Fiscal Consensus generated confusing and intense controversies. Accusations and contradictory arguments prevailed in a key issue, such as the tax system, in view of the need to reverse the economic involution suffered by Argentina.
It is widely recognized that the Argentine tax system is poorly organized. In developed countries, the three main taxes with which the State is financed are the sale tax (generally, VAT), the income tax (in Argentina called “Ganancias”), and the wealth tax. In Argentina, on the contrary, a wide and varied number of taxes are applied, to the point that only half of the tax collection comes from these three classic taxes. A notable case is the sale Tax. A tax levied by the provinces on sales superimposed with the VAT levied by the federal level.
Gross Income is a much more rudimentary tax than VAT. Therefore, it is relevant to analyze how much they contribute to the total collection and what have been the trends in recent years. According to data from the Ministry of Economy, it is observed that:
These data show that sale tax has a high and growing share in the total tax collection when strengthening the VAT is the advisable policy. This situation damages businesses and consumers and provides another evidence of the hypocrisy prevailing in Argentine society. On the one hand, there is a plea for a more neutral and progressive tax system. On the other, it reinforces its structure of highly distorting taxes. In the case of the sale tax, the explanation is that it is easier to collect and to hide to the citizens’ eyes, who are the final taxpayers.
The Fiscal Consensus signed in 2017 stated the goal of reversing this situation. One of its main provisions was to gradually decrease the provincial sale taxes. The logic was that, gradually, the negative impact of the tax reduction would be offset by the expansionary effect of the economic growth. The approach sounds attractive politically but is inconsistent technically. If the diagnosis points out to a bad-structured tax system as a factor of economic stagnation, it is illogical to make the assumption that the economy grows first in order to lower the bad taxes which are the ones that prevent the economy from growing.
The signing of the last addendum is the recognition of the failure in this gradualist strategy. This should drive the search for alternatives. The most interesting way is to unify taxes, tending towards a system with fewer taxes and less distorting. In the case of sales taxes, VAT is clearly better. Therefore, it is advisable to eliminate the sale tax and compensate for the loss of revenue with a higher VAT rate. It is often argued that the VAT rate is already too high to continue increasing it. However, the unification with a higher unique rate is not an increase in the tax burden, but sincerity with more transparency and a single less distorting tax.
Curiously, the most positive aspects of this last addendum to the Fiscal Consensus –and which were the least commented– are the commitments to advance in the unification of taxes. For example, the revision of the small taxpayers’ regime (the Unified Monotax that unifies VAT and sale tax for small taxpayers) and the promotion of the Single Taxpayers’ Registry. In the objective of improving the tax system, these are the issues that deserve to occupy a more central role.
