Argentine Think-Tank Criticizes Growing Tax Burden

by Mike Godfrey, Tax-News.com, Washington

01 October 2009

Instituto para Desarrollo Social Argentino (IDESA), the Argentine Institute for Social Development, has published research concluding that the Argentine economy is overburdened with distortionary taxes and a radical rethink of fiscal policy is required. Recent stiff opposition to tax increases in the Province of Buenos Aires is another manifestation of the inequity of the system, according to IDESA.

The research argues that in developed and well-organized economies the tax incidence is planned to have, as far as possible, a neutral effect on the productive sectors of the economy; value-added tax and income tax are the most common options for generating revenue. In Argentina it is different; a plethora of taxes are imposed and administered at three separate levels, national, provincial and municipal, and moreover the variety of taxes applied include in large measure the category of taxes that the developed economies avoid because of their distortionary impact. These include workforce taxes, stamp duties on cheques, minimum presumed income tax, fuel duties, import tariffs, export duties, turnover taxes and municipal taxes.

According to the Argentine Ministry of Finance figures for 2008, consolidating national and provincial revenue, the total tax burden is 31% of GDP, of which 13% consists of the more neutral taxes (VAT and income tax), the remaining 18% being the aforementioned highly distortionary taxes. This high proportion of distortionary taxes IDESA attributes to the incompetence of the authorities to manage VAT and income tax efficiently to combat tax fraud, and high spending.

The distortions of the tax system are made worse by underfunding of provinces and municipalities, that bear the brunt of meeting social expenditures in education, welfare, health and safety and have extra spending obligations imposed on them from national government. The tax impasse reached in Buenos Aires province is a predictable consequence of the tax regime and could eventually spill over to other provinces, multiply the distortions, disrupt production and curtail social progress, according to IDESA.

IDESA concluded that the present conflict over the 2010 budget gives an opportunity for a radical rethink of fiscal policy. The government should give itself more scope for action, firstly by removing subsidies to public and private enterprizes, by moving away from distortionary or discriminatory taxes and introducing more 'coparticipacion' - shared federal tax revenue.

Recommended