December 4, 2013
Tax floor with flaws
Raising the income tax floor to the round figure of 15,000 pesos is almost universally seen as timed for the upcoming midterm elections and the logic behind this conclusion is all too obvious yet the timing of this move also seems slightly off target, electorally speaking. Why time this feelgood announcement for fully 61 days before the vote, thus giving people plenty of time to forget (even if it is also true that the concrete benefits of this tax relief will first be seen in September paycheques to be paid out in early October)? And why was this tax reduction not announced earlier this month in order to reduce the millions of disgruntled voters in the August 11 primaries? Perhaps a government facing deficit hesitated to dent its revenue base ahead of a preliminary vote rather than the real thing but the fiscal substitutes seem to have been found easily enough according to President Cristina Fernández de Kirchner’s Tuesday announcement.
Despite the nice round figure of 15,000 pesos, this package might not be so neat — both the tax relief and the substitutes may be less complete than presented. Quite apart from the continuing erosion of inflation in the weeks to come, a threshold based on a gross salary stripped of all bonuses might well give many employees less relief than expected. Furthermore, many trade unions are doing their work only too well in terms of securing pay increases, thus setting new tax traps for the future. But even if the tax largesse may be less than it seems at first sight, the new levies are inadequate to offset the fiscal sacrifice — even by the admission of the government, which sets a figure of some 2.5 billion pesos for lost revenue. Unlisted shares are to be taxed 15 percent and company dividends 10 percent but in a labour-intensive, consumer-driven economy with stunted capital markets, such levies cannot logically be expected to pay for a tax relief package reaching some 1.5 million employees, as well as extending family benefits to around 850,000 more children. On the latter subject, the equation of married and single workers might recognize modern social realities but also takes away a reward for assuming family responsibilities.
Assuming the move was electorally driven, will it work? The prospects are bleak — economic performance in the second quarter just before the primaries was far better than any in the last two years and yet the government fared even worse electorally than in 2009, a year of negative growth (except in the official data). This time around the electorates’s love may not be for sale.