The current tax system is the result of partial modifications accumulated over the years and of the responses of the various governments to the increase in public spending. Thinking about a comprehensive, harmonious and federal reform of the tax system requires an analysis of the structural problems of the current system. It requires a systemic vision that looks not only at taxes in isolation but also evaluates them as a whole. And one that considers who pays and to what extent they are paid and collected.
A comprehensive reform of the tax system is needed
The context of macroeconomic instability and low fiscal predictability led to the introduction of emergency taxes that were consolidated over time. High evasion and informality led governments to favour taxes that were easy to collect.
Although they can be implemented sequentially, it is essential to undertake a comprehensive reform that considers not only the total amount collected but also the composition, administration and coordination between the different levels of government.
Objectives of the tax system
What roles can the tax system play?
To finance public spending. Sufficient revenue collection means that spending does not depend on debt financing or monetary issuance by the Central Bank.
Contribute to the distribution of wealth to achieve a more integrated and equitable society. To this end, it is necessary to define how the tax burden is distributed, taking into account horizontal equity (between taxpayers of equal income) and vertical equity (the greater the ability to pay, the greater the contribution).
To generate the least possible brakes to economic development, by reducing the distortion of the system and treating similar activities in the same way.
Facilitate collection by the State and compliance by taxpayers and thus minimize evasion and avoidance.
What role should the Argentine tax system play?
Although from a conceptual point of view, the tax system can fulfil several objectives, the Argentine experience leads us to think that it is necessary to prioritize the role of financing the public budget to contribute to stabilizing the macro-economy and promoting development. In this sense, it does not propose changes in the level (the amount to be collected), expressed on the expenditure side and therefore decided by citizens through their representatives, but concentrates on the composition (what kind of taxes) and administration (who collects) of the tax structure.
Inflation and informality significantly influence the tax system, and the tax system influences them. An example of this is that a high tax burden with high compliance costs on the taxpayer generates informality, while informality generates more pressure on the formal segment of the economy. In this sense, the proposal also seeks to discourage informality in the economy.
Review the structure of the tax system
What types of taxes exist?
Taxes can be grouped into 4 broad categories:
- on income and capital gains;
- on property (a house, a company, stocks and bonds, etc.);
- on goods or services (transactions, including cheque tax, VAT, those levied on international trade such as imports, gross income, etc.);
- social security contributions (such as pensions and social security).
What types of taxes prevailing in Argentina?
Grouping taxes into categories and comparing Argentina’s tax structure with those of Latin American countries, countries with similar incomes in the region and OECD countries, there is an excess of taxes on goods and services and a low share of taxes on income, profits and wealth.
In Argentina, most taxes are levied on goods or services. It is also in this area where we find the greatest difference with other countries. This is explained by taxes on exports, gross income, foreign exchange operations and financial transactions (bank debits and credits), which in Argentina have a higher weight than in other countries where they are almost non-existent.
Another major difference is about taxes on income and profits. These account for 17.5 per cent of total revenue, less than in OECD countries (33.1 per cent), the region (26.3 per cent) and countries with similar incomes (27.5 per cent). Property taxes also have a low share.
Finally, taxes related to social security contribute in Argentina (17.9%) a share similar to that observed in the region (17.1%), but lower than that of OECD countries (27%). In addition to the general informality of the labour market, the difference is in the self-employed regime (including the Regime for Small Taxpayers), where Argentina collects less than one-third of that observed in other OECD countries (0.3% versus 0.9% of GDP).
It is necessary to reduce the weight of taxes on goods and services with undesirable characteristics and to strengthen taxes on income and wealth, seeking to achieve a better balance between different types of income to avoid an excessive bias on labour income.
Proposals to strengthen income and wealth taxes
Unify contributions and profits
It is proposed to re-establish the income tax on salaried workers and combine it with personal contributions in a progressive tax that would allocate its revenue to the social security system, the main source of public deficit.
Establish a negative income tax
Contributions could increase progressively upwards, but also downwards. To achieve the latter, a minimum taxable amount is established whereby, when declared income is below this minimum, the tax becomes a subsidy, which decreases as declared income increases. Only when the established amount is reached would the person start to pay. The aim is to decouple the collection of social plans from informality and, on the contrary, to encourage formality.
Hierarchise and increase the progressivity of the single tax system
Although the single tax system contributed to formalization by incorporating people into the system, it also encouraged under-declaration of income and subcontracting, discouraged business expansion and reduced the number of self-employed workers due to the high relative “tax cost” of this regime.
The reform proposes to maintain the simplicity of the regime by broadening the categories and increasing the rates, making them more progressive, creating greater equity between workers and smoothing the transition to the general regime.
Proposals to reduce the burden of taxes on goods and services
Eliminate export taxes
The loss of revenue can be compensated with the automatic increase that their disappearance would generate on income tax and VAT (among others), in addition to unifying the corporate tax rate at 35% and establishing a minimum tax calculated on sales or assets, applying an additional tax on natural resource income, mainly for hydrocarbons and mining, and eliminating the exemption of rural real estate in personal property.
Improving administration and collection
Coordination is central to the role of tax policy, as the current failures are one of the main problems of the system. There are enormous difficulties in federal coordination and centralisation at the level of administration that affect tax collection and management.
Almost half of what could be collected is collected
To measure the efficiency of the tax system, it is useful to know how big the difference is between what should be collected and what is collected. Potential revenue is made up of:
- what is collected;
- what is not collected due to tax exemptions (benefits and incentives that reduce the burden on certain consumption, income, taxpayers, activities, etc.); and
- what is not collected due to fraud, avoidance, management failures and other shortcomings, largely attributable to the administration.
Today, half of the potential is collected. A large part of this gap is explained by evasion, which, related to informality, exposes the formal sector to very high pressures, discouraging formality.
Lack of federal centrality and coordination
Tax resources come from the federal and sub-national governments. This makes it necessary to coordinate, both between the nation and the provinces (vertical) and between the provinces (horizontal), in terms of tax design and collection. Even when there are agencies that fulfil this role, they do so in a partial (for specific issues and leaving a certain institutional vacuum) and fragmented (among different agencies) manner.
Proposal to strengthen coordination by prioritizing a federal tax body
The need for coordination between levels of government in tax matters can be summarized in two main issues.
On the one hand, the enactment of a new Co-participation Law is pending. Any tax reform affecting the co-participation mass will require agreement between the nation and the provinces.
On the other hand, and closely related to the above, an agreement is required to establish a federal body to coordinate the tax administration of sub-national taxes and help simplify the tax system. Harmonizing and coordinating among provinces simplifies implementation and operation, facilitating the task of taxpayers and tax administration agents.
Proposal to streamline tax administration and establish compliance incentives
To unify or harmonize tax procedures, it would be useful to establish a rule that involves expanding the Single Tax Register (RUT), simplifying tax registration and payment through processes that include tax pre-registration, leading to the definition of a single electronic tax domicile per taxpayer for all jurisdictions, unifying the penalty regime and binding consultation, among other issues.
To improve tax compliance and reduce pressure on the formal sector, incentive mechanisms (instead of exemptions) are proposed that also help formalization.
