Elimination of Income Tax: Tax injustice?

Text prepared jointly by Malena Vivanco, María Julia Eliosoff, Martín Mangas, Francisco Cantamutto, members of the Fiscal Work Space for Equity (ETFE).

The Minister of Economy and candidate for president Sergio Massa approved Decree 473/2023 on September 12 and sent a bill that proposes raising the floor from which the income tax of the fourth category is paid at an amount equivalent to 15 times the minimum, vital and mobile salary. Thus, it would go from $700,875 to $1,770,000, with adjustment twice a year (in January and July). The goal is to tax only the “highest incomes,” leaving lower brackets exempt from the tax as it stands today.

With this, the rate scheme is also reformed, going from oscillating between 5% and 35% to between 27% and 35%. It is estimated that only 90,000 taxpayers would be reached, which represents less than 1% of the country’s registered jobs, leaving 800,000 taxpayers exempt. What implications does this have? Is it an improvement or does it make the tax’s current problems worse?

To answer this question, it is necessary to clarify the name of the tax, which often leads to misunderstandings. In any tax system, there are taxes that are levied on people and companies according to their ability to pay, which we call “progressive” because through them those who have the most contribute more. The ability to pay can be measured by: income, consumption and wealth (land, cars, money, stocks, bonds, etc.). Income can be from work, from state transfers (such as retirements, pensions and subsidies), or from income (obtained from returns on shares, interest, dividends, rent, exercise of commerce and liberal professions).

In Argentina, since 1973, the tax on high incomes has been called “profits” and the law defines it as “net income.” This has led to a semantic discussion since the tax conceptually does not tax profits. (salary is not profit), but high income obtained from personal work. Taxes such as personal property or the tax on large fortunes tax wealth. Taxes such as VAT or Gross Income (IIBB), consumption.

Income taxes are implemented throughout the world and have higher revenues in countries with more progressive tax structures, such as those in the OECD. It is not a rarity nor is it an insignificant fact: 70% of the countries in that organization do not have floors for taxing income (everyone contributes something) and for 25% of the countries the weight is 23% of the average salary. With these new measures in Argentina the floor would be US$2,400 while in Brazil it is US$552, in Uruguay US$1,000, in Chile u$890 monthly or in Germany €9,408 annual. That is, fewer people are reached in Argentina compared to other countries.

The tax falls on people whose income exceeds a taxable minimum, to which some deductions are applied, and from there different rates operate that increase as net income rises. Precisely, regarding the form of determination, until now it worked in a not entirely orderly way: some deductions had an automatic update by the RIPTE index and others were defined by the government in power in an arbitrary manner, which meant that who was reached could change your condition in an unforeseeable way. Given the high inflation, this amount was constantly eroded by the dynamics of salary renegotiation, making more and more workers able to exceed that amount (and, therefore, begin to pay taxes) without these increases implying a real improvement in your income. The continuous progression technique of the tax allows avoiding abrupt jumps in the amount to be paid when changing sections of the scale, but that did not prevent even net income from being affected downwards due to the effect of a higher rate. In this sense, the determination of an objective criterion with a semiannual update appears as an advance with respect to the current situation.

Now, the chosen criterion (15 SMVM) reflects the desire that only income be taxed extremely high, and no other income relatively high, which is questionable in terms of equity. In Argentina, and in Latin America in general, the tax system is predominantly regressive. This means that State intervention through tax collection worsens inequality, because collection is mainly based on taxes such as VAT, which disproportionately affect lower-income sectors. In 2022, VAT contributed 43.05% to national tax collection. In terms of participation in total collections, gains followed with 34.81%. Taxes on wealth, on the other hand, lack a significant participation: personal property contributed only 3.12% the same year.

In this framework, measures that reduce the payment of profits are not progressive. On the contrary, they mean a worsening if the system as a whole is looked at and contribute to the State being seen as a producer of inequalities, delegitimizing its actions towards those who have less.

The elimination of the first sections seems a disproportionate response to relieve the medium-high sectors, affected by inflation. An alternative that seeks a fairer system would be to define a floor that reaches high incomes (not only the extremely high ones), include more scales with rates that start low and grow with the income brackets, which would alleviate the tax requirement for the initial brackets (you start paying little) and raise it in the higher brackets. It is worth remembering that these upper sections are also characterized by their greater capacity to carry out tax evasion and avoidance maneuvers, which imply a great loss of resources for the State and reflect the great inefficiency of the existing mechanisms.

But would this be enough? Neither. The current system is deeply inequitable and ineffective; these types of measures continue to contribute to covering up deficiencies with patches in an uncoordinated manner. It is necessary to address the problem comprehensively. Taxes currently do not have the capacity to tax the dominant sectors, and it is necessary for the State to focus its efforts on achieving them.

It is worth mentioning other of the announced measures, which apply the VAT refund to workers who receive income below $708,000, retirees and pensioners, AUH holders, monotributistas and workers in private homes contribute to mitigating regressivity of the tax, and are a favorable step towards fiscal measures that reduce inequality. However, they are transitory measures that should be definitively consolidated. In addition, they have a limit of $18,800 per month, a figure that is between 6 and 11 times lower than what those who stop paying income tax will receive.

Future efforts should be focused on reorganizing the tax model on new tax bases. It is essential that the sectors that have the greatest capacity to do so contribute more and in this way prevent SMEs and people with fewer resources from bearing the tax burden. It is key to review the taxes that levy, in addition to large incomes, consumption, wealth and assets: increase the scale of Personal Property rates, update the tax base of the Real Estate Tax (the collaboration of the provinces is central in this) , review unjustified and inequitable tax expenditures and extend indefinitely the VAT refund on essential goods. We need to move towards a progressive, effective and transparent tax system, in which those who have the most contribute more. Those who have less cannot endure more.

In this framework of narrow fiscal space, it is worth asking about the limits of a measure that gives up collecting capacity, reducing the possibility of the State to face the loss of purchasing power of the most impoverished sectors. As an example, this measure implies 0.6% of GDP, double what was allocated so far this year to the AUH, policy that was also reduced by 12.2% in real terms. For the Argentine tax system to collect equitably, we must continue discussing a comprehensive review of our tax system, where we all contribute to guaranteeing our rights according to our ability to pay. At ETFE we believe that it is urgent to move in this direction, and that is why we propose concrete ideas to move forward.