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February 17, 2021

The Week at a Glance

Argentina: Income Tax Populism

BY Miguel A. Kiguel, Alejandro Giacoia, Andrés Borenstein, Lorena Giorgio, Rafael Aguilar, Isaías Marini

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Last week, the government presented a bill to modify the income tax paid by individuals that is a step back from many angles. The central idea is that just over half of the salaried workers who today pay the tax stop doing so. Essentially it would reduce the universe of taxpayers from 2 million to about 750,000 at a cost that the government estimated at ARS 40,000 million, probably something more.

In macroeconomic terms this is not a significant amount. We are talking about 0.1% of GDP (it could be something more) that will have to be financed between the provinces and the national state. Nor is it much stimulus to consumption, considering that the 3,500 million pesos per month of tax savings have to be divided between 1.25 million people.

The problem with this patch is that it does not make sense neither from the tax design nor from the logic of income distribution. Personal income tax is paid by the two richest deciles and a few in the third decile. So this relief is going to hit the second richest decile of the population and will help some in the first decile as well. In other words, there is a great problem of focus in this measure that is clearly regressive at a time when poverty exceeds 40% of the population.

From the design, the patch is even worse as the project breaks with the concept of progressive rates. As it is a special deduction that is extinguished when spending 150,000 gross pesos of income per month, it will happen that salary increases end up generating in-pocket losses. The government can enable smoothing clauses to mitigate the effect, but it puts a great distortion on the labor market. In addition, it further breaks the horizontal equity between employees and independent workers who are left in a much worse situation.

In addition, the government leaked that the fall in tax revenues will be recovered with an increase in corporate income taxes. This would operate by not applying the Macri reform that lowered the rate from 30 to 25%, but also with an increase in the tax on dividends from 7 to 13%, that would make a company that pays 100% of dividends to pay from 34.9 to 39.1%. Argentina has a giant investment deficit and more taxes leave it at a disadvantage against many other jurisdictions.

Countries have been moving in the opposite direction. They lower taxes on corporations to attract capital and try to get more people to pay income tax, since this is a tax almost without distortions and it is very equitable by applying progressive marginal rates and covering particular situations through deductions (children+, interest on a single home mortgage, etc.). Before the reform proposed by Deputy Massa, Argentina was already one of the countries with the highest non-taxable threshold in the world, now we will be champions.

There is consensus among economists and tax experts that the proposal is rather sketchy. But political economy goes the other way. Neither the governors who will pay more than 60% of the bill nor the opposition seem to have the will or ability to oppose it. When Massa proposed something similar during the Macri government, the governors subtly operated in the Senate to overturn it. It won’t happen this time. Demagogic phrases are back, such as “salary is not profit” that arise from a bad name for the tax that should be called as in other places: “income tax”.

 

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