December 8, 2013
Income tax rise 'likely' to lead to more consumption, inflation
By Fermín Koop
More consumption and higher inflation are the two main effects analysts expect will be felt in the economy following the federal government’s decision to raise the income tax floor to 15,000 pesos.
Economists also raised questions about how the government would make up for the red ink that the measure would create in its balance sheets.
Supermarkets and associations of shopping malls estimated that 4.5 billion pesos are expected to be destined to consumption as a direct result of the increase in the tax floor that will mostly benefit the middle class.
“This increase helps to sustain the general levels of consumption. Regarding sales at shopping centres, we expect more transactions. It’s a measure that benefits everybody,” Mario Nirenberg, manager of the Argentine Shopping Centre Chamber, said. “When people buy more, there’s also an increase in what is collected through the value-added tax (VAT).”
Juan Vasco Martínez, executive director of the United Supermarkets Association (ASU), agreed with Nirenberg and said that “based on previous experiences, increase in sales will be seen in all segments and categories.”
The government’s decision to increase the income tax floor also included an expansion of family benefits and a bill to increase taxes on certain financial transactions.
“This measure will definitely have a positive impact. The money that was originally destined to pay the tax will now go to retail consumption,” Agustín D’Attellis, economist of La Gran Makro, a pro-government group, told the Herald.
Federico Muñoz, economist, told the Herald that he expected positive effect because “people will have more money in their pockets” but raised doubts about claims that it would lead to significantly higher levels of consumption.
“I presume it will have a positive impact but I am not so sure,” Muñoz said. “Argentina now has a difficult financial context that will worsen in the second half of the year,” he said.
Ariel Setton, economist and member of Plan Fenix, told the Herald that “the direct effect of the measure will be more consumption” but warned it could also lead to a higher inflation.
“If the government decides to issue more money to sustain the levels of consumption, it can create an increase in prices,” he said. “The income tax is progressive and I think a medium income should pay it. The government’s decision is regressive and didn’t involve changing the scales.”
The decision to exclude 89.9 percent of the workers and 99.3 of the retirees from the income tax means the government will give up on collecting 4.495 billion pesos.
A bill is currently making its way through Congress that will implement a 10 percent tax on dividend payments to shareholders and a 15 percent tax on unlisted shares. These are the new taxes that the government has chosen, which will have to be approved by Congress.
“These two new taxes are a correct decision but they won’t be enough. The money will have to be obtained from other sources like reviewing government subsidies,” D’Attellis said. “The main impact will be in the short term and the fiscal deficit will increase. But it’s nothing to worry about.”
Setton assured that both taxes are “positive” since they were decided after two meetings President Cristina Fernández de Kirchner had with businessmen but warned about a possible increase in the deficit.
Muñoz also agreed that both taxes “won’t be enough,” adding that “the government will likely increase financial assistance to the Central Bank to finance the higher fiscal deficit,” he said.
Floor hike a state benefit
Article 3 of the decree on the floor hike specifies that the wage slips of workers who previously paid income tax and as of September 1 will be exempt will have to state: “Benefit of the National Executive Branch.”
Self-employed, the pending issue
The government is now analyzing whether to update the tax scales for the self-employed, the head of AFIP tax bureau Ricardo Echegaray said yesterday.
Independent workers have long complained they have been forced to pay increasingly higher taxes because the scales used to determine how much to pay has failed to keep up with inflation.
“We are currently studying all the types of taxes, including the ones on self-employed people,” Echegaray said, adding that “we will make a decision before the end of the year.”
Echegaray was also asked why the government decided to push the increase in the income tax floor by decree rather than by law, only assuring the changes until December.
“We took this decision because it was the only one we could take right now,” he said. “The decision to change the tax scales has to be taken by the Congress and it implies a big modification of the tax.”