Few things reflect a divergence from normal countries’ policy choices than the proposals to modify the Income tax that are in Congress. We have already discussed in this report about the regressiveness of the elimination of Income tax for workers with salaries of up to 150,000 pesos per month, mostly in the second-highest income decile, in addition to destroying the concept of marginal rates. Now it is the turn of the corporate Income tax.
The proposal segments the rate into 3 groups of 25%, 30% and 35% to which are added the dividend distributions, the highest rate being for those that earn more than 2.6 million pesos per year, that is, less than USD 20,000 measured in market dollars. This means that the vast majority of companies will face a 35% rate, compared to the 30% that was paid so far and compared to the 25% promoted by the 2017 reform.
There are two big problems. The first is design. There are no countries that segment the rate, as is proposed. It generates more incentives to evade and can induce the division of firms to avoid the higher rate. It does not provide incentives to grow. In theory, companies should be encouraged to be more competitive and, among other things, to take advantage of economies of scale.
Perhaps the second problem is more serious: the increase of the rate. Corporate Income tax rates have been falling sharply in the last four decades. Currently the average for Europe is at 20%, Asia 21% while the Americas and Africa are at 27%. According to the Tax Foundation, the average of 177 countries is 23.85% and the average weighted by GDP is 25.85%, 10 points less than the Argentine proposal. In Latin America, Suriname and Puerto Rico are the only ones that will end up above Argentina. Even Scandinavian countries and France, famous for having high taxation and large states, charge firms less through Income tax. At the height of Argentina will be Congo, Chad, Sudan, Zambia, Malta, Kiribati and Guinea. In 2020 there were 10 changes in the world in terms of corporate profit rates. In nine cases they were low, while in Micronesia the rate was raised from 21 to 30%.
Attracting large investments to Argentina was already difficult. Being one of the countries with the highest income taxes in the world, it is one more stumbling block. To which is added not only the level, but the frequency of the change. Although SMEs are important in any country because they generate employment and provide large companies, in general, technology, productivity, quality registered employment and training comes from large firms. If you want to help SMEs, there is a huge menu of policy instruments without the need to distort taxes so much. From credit guarantee systems, incentives for formal hiring, no withholding of taxes and many others.
To all this perspective of greater taxation (to which are added the Wealth tax for shareholders, the rise in Gross Income tax in many provinces), are added the information requirements on stocks, production and costs. These moves not only increase the costs of the companies, but also increase the invasive feeling and the perception of state as a Big Brother. At Econviews we always said that inflation is not fought with controls, so this idea introduces noise without a tangible benefit to society. Credibility, a pure public good, and investment are at historic lows. The sentiment of businesspeople as well. With more taxes and more controls, it is difficult to think of how to recreate a successful investment process.