24/11/2017 -
Edition 729

Property taxes should replace sales tax

The National Government finally announced the guidelines for its tax reform proposal. Among the issues that remain to be discussed are provincial taxes. The main challenge is to encourage the removal or reduction of the Sales Tax and Stamp Tax. To compensate the reduction of these taxes a coordinated strategy will be need to increase property and wealth taxes, where tax collection is still very low. 

The national authorities presented the guidelines of the tax reform that the government plans to propose in the National Congress. One of the most relevant aspects that remains pending is reviewing the provinces taxes. The priority is to reduce the incidence of the Sales Tax and Stamp Tax. These are very rudimentary taxes that have increased significantly in the last decade in all provinces. The aim was to compensate for the centralization of resources at the national level.

The national and provincial tax pressure in Argentina amounts to 31.3% of GDP, of which the provinces collect 5.2 p.p. On average, the provinces’ tax collection is explained 76% by the sales tax, 20% by property taxes and 4% by other taxes. These shares show that the Sales Tax is the main support of the financial autonomy of the provinces. Consequently, any change requires activating an alternative source of income.

Facing this challenge, it is relevant to evaluate the potentiality of property taxes. According to the Ministry of Finance and the OECD, it can be seen that:

  • The Argentine provinces collect through the property taxes the equivalent of 1.1% of the GDP.
  • In the OECD countries, these taxes contribute 1.9% of the GDP.
  • In developed countries, property taxes represent 2.4% of GDP.

 

This data shows that provinces collect relatively little from property taxes. This results in an important weakness for the tax system, since these taxes are those that contribute to improving income distribution and have a less distortionary impact on production and employment generation. It is encouraging to see that from the comparison with other countries there is a wide margin to increase their collection. If developed countries are taken as reference, Argentinean provinces could easily aspire to double the collection of property taxes.

Some provinces, such as Buenos Aires and Córdoba, are moving forward in this direction. But it is just a first step. It demands political courage and technical capacity to address the substitution of distorting taxes for taxes that levy on wealth. It need to be kept in mind that the Sales and Stamp Taxes are very easy to collect from an administrative point of view and very friendly politically, since they go unnoticed by a large part of the population. On the other side, taxes that levy on wealth are complex to manage and they explicitly put the burden on the middle and upper segments of society generating resistance and rejection.

To deepen to the rest of the jurisdictions what appears now as an incipient change in some provinces an active role of the national government is needed. On one hand, the Tax on Personal Assets, which is currently collected by the national government should be eliminated to allow the provinces to be the only ones responsible for imposing wealth taxes. On the other hand, it should be induced the modernization of the collection agencies and ensure they operate homogeneously throughout the country (similar to what already exists in the case of motor vehicles). It is also very important that the provinces have access to reliable and up-to-date information on the financial assets owned by their inhabitants.

In addition to rationalizing the national tax system and dismantling the strong centralization of resources, it is very important to rethink provincial taxes. It is a very complex challenge since it forces to leave the comfort zone of the last decade, when there was an abusive growth of these rudimentary taxes. In parallel, it’s important to prioritize, as more advanced societies do, property taxes, which have a much more progressive social impact and a much less distortionary impact on production and employment.

Palabras clave:
Desarrollado por dotPlan