May 19, 2022 2:32 am

Taxes and expenses: which is the chicken and which is the egg?

Deputies who militate in the opposition are collecting signatures to present a bill that reduces the general rate of value added tax (VAT) by 3 percentage points, lowering it from 21% to 18%. How important is it that the initiative is adopted by the ruling party or by the opposition? If there is a difference, what is the opposition looking for with this?

On this question I consulted the Canadian Richard Miller Bird (1938-2021), who studied at Columbia University and taught at Harvard, Columbia and at the universities of Toronto and Monash and Erasmus. In addition to which he worked in the fiscal policy division of the IMF. He dedicated a large part of his professional work, which lasted more than 60 years, to the analysis of tax issues raised in developing countries, located in Asia, Africa and Latin America, advising more than 20 of them. “It was a walking encyclopedia on public finance and development. The fraternity of people dedicated to public finance has lost a legend. He was concerned about the existence of too high or low tax limits, exaggerated exceptions and multiple rates”, indicated Marapalli Govinda Rao.

–Any proposal to reduce a tax rate puts on the table the curve proposed by Arthur Betz Laffer. What is the foundation and what are the implications of the aforementioned curve?

-The idea is old. Laffer’s credit consists in having represented it in graphic terms. Let us imagine one in which the collection generated by a certain tax is measured on the horizontal axis, and the rate applied to the tax base is measured on the vertical axis. Let us think of a tax on the sale of a certain product. If the rate is 0, the collection will also be; and if it is so high that no one will demand the product, the collection will also be zero. While each of the intermediate levels of the rate generates collection. Take a pen and trace it on this very journal page, so that an important implication appears.

-Which?

–That two aliquots generate the same collection. Upholding this figure, supporters of the so-called supply side economy suggested reducing tax rates, to stop discouraging the private sector, without sacrificing the treasury. As expected, the proposal was hotly contested.

-Why?

–Because in practice it is not always easy to determine if the highest or lowest rate is being charged on a tax. In the first case, if a loss occurs, both the private and public sectors improve their situation; while if the lower rate was being collected and it is reduced, the collection falls. The resistance to implementing this, on the part of those in charge of public finances, is understandable.

-The experience of Javier Alfredo Iguacel, isn’t he eloquent about it?

-As mayor of Captain Sarmiento, he eliminated 109 of the 130 municipal taxes that existed, and the collection increased well above the rate of inflation.

“That’s what I’m telling you.

– Calm down, De Pablo, I understand your enthusiasm, but, beyond the value of your decision, we must clarify that these are different cases. Because Iguacel did not reduce rates, but simply eliminated most of the rates charged by the municipality at its expense.

-Yes, but the important thing is that it made life easier for the inhabitants of Capitan Sarmiento, who were able to dedicate themselves to more useful activities than spending the day with their accountants and standing in line at the town hall.

– Okay, but I’m not sure if they were so happy, because they ended up paying more than before. The case is also interesting from the collector’s point of view. How is it that with 21 municipal taxes they collected more than with the 130 that existed before? I do not have specific information, but it is very likely that the aforementioned tax simplification has improved the verification of compliance with tax obligations.

Let’s focus on the reason for this conversation. In the Argentina of 2022, what is the opposition looking for by wanting to reduce the VAT rate and what difference does it make if the project was being promoted by the ruling party?

-The latter is unthinkable, in light of his background, but let’s analyze the situation, to understand. The ruling party is always ultimately responsible for fiscal results. Ergo, if you were driving it, it’s because you’d be thinking in terms of the Laffer curve.

–But the opposition drives it, and then?

-The people express themselves through their representatives, who in Argentina are the deputies of the Nation. Within the opposition, among others, people with economic training were elected who swore by their mother that they will not create more taxes, nor will they increase the rates of the existing ones. The latter, in an inflationary context, must include the indexation of deductions and scales, expressed in national currency. This is the “mandate” they received. Which means that the reduction of the VAT rate pursues a main purpose.

-Which?

– That the Executive Power is forced to reduce public spending.

-And if it does not do it and, as a result of the measure, the collection falls?

–It will increase the fiscal deficit and, given the impossibility of financing it by contracting more debt, it will increase the pace of monetary issuance and, over time, the rate of inflation.

-Are you saying that the deputies of the Nation who vote for this law will be promoting inflation?

-As I said, what those deputies want is for the Executive Branch to rethink public spending. They do it with the tools they have. The national budget for 2022 was not approved and, while waiting for this to happen, a reduction in the VAT rate may precipitate decisions. Of course, what those decisions will be today is an open question.

– What do you think of the fiscal rebellion that some are talking about?

–It is easy to say “I will not pay more taxes”, but with the technology that the AFIP has today, once one is registered, how is it done? For this reason, in Argentina 2022, the fiscal rebellion has no choice but to approach it head-on, preventing the abuses that the Executive Power may incur in the name of the economic emergency, blocking the creation of new taxes and reducing the rates. of some of the existing ones.

-Fight continues, by what is seen.

-Inevitable, but that as a result of the 2021 electoral result the conditions to fight have been made possible is very good news. If the current reality makes you uneasy, imagine how you would feel if in September and November 2021 the ruling party had beaten the opposition by 9 percentage points.

Richard, thank you very much.

Reference-www.lanacion.com.ar

Comments (0)

Leave a Reply

Your email address will not be published.