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The taxman moves ahead of the ax-man

Dujovne’s proposals aim at two basic shifts in Argentine taxation, one setting a new trend and the other confirming the traditional pattern. The novelty is shifting the tax burden from the corporate sector to personal levies. The other was to transfer part of the burden from direct to indirect taxation.

Saturday 4 November, 2017
Nicolás Dujovne.
Nicolás Dujovne. Foto:Pablo Temes - CEDOC.

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“Basically the same question as last week over whither the economy – but this time after and not before the Argentine electoral map started resembling a Donald Trump hairdo,” writes Dr Hale in his latest consultation from New England.

“Plus I’d also like to fine-tune that question a bit. Firstly, to what extent will the electoral momentum be used to pursue political advantage and to what extent to undertake serious structural reform (we’ve already seen in France this year how quickly that can transform electoral landslides into dwindling popularity ratings)? And if he does embark on reform (as looks highly probable), to what extent will he be shooting for quality and to what extent speed and the image of hands-on government, as opposed to substance? This week gave me mixed messages there – it started with President Mauricio Macri tossing one of his election night balloons into the air eight days late with that vapid appeal for a ‘grand national agreement’ towards such ‘motherhood and apple pie’ objectives as creating jobs and reducing poverty. But the next day you have Treasury Minister Nicolás Dujovne spelling out his Halloween ‘trick or treat’ tax package with some fairly specific proposals.”

My reply:

“Nobody creates jobs or reduces poverty with a speech – not Macri, not Cristina, not anybody. The difference between this administration and the previous is the day after – under Cristina Fernández de Kirchner everything revolved around the presidential speech (in many ways a more serious flaw than any ideology). This shows that Macri has a team. While not foundational as per the official hype, I did not find Macri’s Monday speech that bad – he’s not a natural-born orator and he covered plenty of old ground (what’s wrong with consistency?) but he made some telling points and his tendency to use data for problem identification rather than propaganda purposes should be rated positively. But I don’t wish to dwell any more on the speech because I feel that making speeches such a focal point of analysis is one of the things that need changing in Argentina.

“Instead I would like to concentrate on the tax proposals which will clearly be spearheading the structural reforms. No matter how specific or comprehensive, these are writing in sand ahead of sitting down with the provincial governors and defining federal revenue-sharing. That meetingoriginally scheduled for the first week after the midterms has now been postponed until next Thursday – at first sight this might look like postponing the nitty gritty in favour of a vague consensus butt his agenda switch and the presentation of the tax proposals now makes it look as if Macri will be telling the governors rather than asking them, making the most of his electoral mandate.

“Dujovne’s proposals aim at two basic shifts in Argentine taxation, one setting a new trend and the other confirming the traditional pattern. The novelty is shifting the tax burden from the corporate sector to personal levies, as recommended more than once in this column to reverse the syndrome of ‘poor businesses and rich businessmen.’ But the other shift was to transfer part of the burden from direct to indirect taxation within a system which favours the latter far too much by lowering income tax and upping excise. The targets of the latter are both old and new – from good old-fashioned ‘sin taxes’ such as on drinks of every kind (if your comedian W.C. Fields famously said: ‘I never met a drink I didn’t like,’ it seems that Dujovne never met a drink he doesn’t like to tax) to such innovations as Netflix, as well as various types of vehicle.

“But the big novelty of this package in many eyes is the financial levy. Critics will argue that this runs counter to all the efforts being made to encourage investment (and hence job creation) by reducing payroll surcharges including severance, especially since small savers are being exempted.

In fact, the debate over this levy dominated our email interchange of three weeks ago.

“This tax package has to be analysed measure for measure because it is very difficult to place under any blanket label. In other circumstances this might have been a classic supply-side drive to cut taxes and stimulate growth but the size of the fiscal deficit makes that impossible – some burdens are indeed lightened to lower costs but the revenue needs to be recovered elsewhere although the package’s final balance for the Treasury was given as mildly negative. Thus the cheque tax – a fruit of the 2001-2002 economic meltdown which is high on virtually every list of the so-called ‘bad taxes’ – survives and the distribution of its proceeds will surely be at the forefront of the upcoming negotiations with governors.

“Nor is it an orthodox ‘austerity’ package as declaimed by the opposition and not just because of its gradualism. Lowering income tax is a highly political move because social justice and ‘zero poverty’ should be taking taxation in the opposite direction – sales taxes charging the pauper and the millionaire the same are the least progressive of all but previous negative experience with the income-tax ceiling seems to incline the government to yield to the power of a lobby including many trade unions. To be sure there is an effort to limit the new excise to luxury items but no reductions of IVA valueadded tax on food or other basics is offered. Higher indirect levies also pressure inflation (notoriously the ‘tax’ which punishes the poor the most), thus negating any advances in lowering the fiscal deficit as far as taming prices goes.

“This does not exhaust analysis of the package but it is also premature ahead of clearing the obstacles of the provincial governors and Congress – thus it was impossible for Dujovne to say anything about such a major barrier to competitiveness as gross earnings taxation other than reiterating that its reduction would be proposed to the governors.

“But even more than governors or Congress, the outside world is a factor. China has just offered a freetrade agreement (where would this take a trade gap already at US$5 billion with a closed economy?). And since you closed last week’s email by tipping John Taylor for the Fed, Dr Hale, it now seems that Trump (always a lax businessman) does not necessarily want tight money.

“It’s an unpredictable world where you cannot even always trust Trump to do his worst.”


(*) Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.


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