July 25, 2014
Tax reform funding splits opposition
UNEN-Broad Front leaders still negotiating consensus bill that would tax capital gains
Despite the fact that the entire opposition has vowed to call for weekly special sessions in the Lower House to discuss a modification to the income tax floor, for the moment there is no consensus among the respective blocs on what kind of reform they would like. Disputes over the best strategy to update the income tax floor and how to finance the lost revenues — if at all — have so far proven too divisive and each bloc is still promoting its own approach as the best.
For now, the UNEN-Broad Front is internally negotiating a consensus bill which lawmaker Victoria Donda has labelled as “the most sustainable and equitable,” and which is based on a capital gains tax. In contrast, members of both the PRO and Workers’ Leftist Front (FIT) have expressed misgivings about such a bill to the Herald.
Inflation and recent salary increases means the tax is being paid by approximately 750,000 people, and that is increasingly hurting middle-class families and workers instead of the highest-income earners, argue the lawmakers. Income tax is currently payable on salaries once they surpass a minimum of 15,000 pesos a month.
The discussion may ultimately prove to be academic as there are rumours that the government will issue a decree raising the tax floor before the payment of June’s half-yearly bonus. On this point there was absolute consensus among the lawmakers consulted by the Herald. All of them argued that a decree would only postpone the discussion and a definitive solution.
UNEN seeks unity
This week’s attempt to call a special session was hampered both by the lack of a response from the Victory Front (FpV) but also because of a lack of unity in the proposals to be discussed. Within the UNEN-Broad Front alone, drafts from Roy Cortina (Socialist Party), Victoria Donda (Libres del Sur), Mario Fiad (UCR), Daniel Kronenberger (UCR) and Ricardo Alfonsín (UCR), among many others.
Lawmaker Victoria Donda has been one of the most vocal proponents of a reform to the tax floor within the Front and in conversation with the Herald she emphasized that the negotiations are centred around the “most comprehensive bill, which is the one presented by Ricardo Alfonsín, as it goes beyond raising the income tax floor. It is also sustainable in the long run as it is financed by increase in the tax rate paid by the highest income-earners and it strikes down the exemption on capital gains taxes.” Businesses tied to the gambling industry may also face increased taxes on their earnings.
Donda has a draft of her own, which has been part of the UNEN negotiations, that not only sets the tax income floor at 28,800 pesos but also updates the tax brackets for a scale which has remained constant since 2000. The update means that it is not only the lowest tax bracket which is raised but the entire scale, and ensures that the highest income earners pay higher tax, thus contributing to offsetting lost revenues.
However, estimates for how the respective tax cuts and hikes add up remain elusive, leaving the question of the financial impact of the measure unresolved for now.
Another fundamental aspect of the UNEN draft, which is still in the process of being finalized, is that it establishes “fiscal units” to determine what the price floor should be. Those units are defined on the back of the RIPTE (Average taxable income per permanent employees) index, and the idea is that as salaries shift in time, the income tax floor would be updated automatically. Current estimates for the tax floor with this mechanism would make monthly salaries up to 28,800 pesos free of income tax.
The UNEN-Broad Front is hopeful that it will have a unified bill by this Wednesday, but Donda said that “for now we are focusing on reaching an agreement within the Front” before seeking to find a wider agreement with the other blocs.
Consensus proves difficult
Lawmaker Néstor Pitrola (FIT) similarly told the Herald that there was an interest in defending his bloc’s bill in progress, differentiating his caucus from the government and parts of the opposition in the same breath. The emphasis on taxing financial assets and gains is important as one of the recurring criticisms from the government has been that any alteration to the tax floor would likely lead to reduced tax revenues for the government. However, restoring the tax on capital gains has received a negative response from the PRO as well as the FIT.
Speaking to the Herald, PRO lawmaker Jorge Triaca, an author of various bills addressing the the income tax system, rejected the UNEN-Broad Front move on the grounds that “it’s a separate discussion, and in any case we believe that in Argentina people are tired of taxes and we shouldn’t be adding any more.”
The PRO draft to increase the tax floor would take it 19,500 pesos, and includes a provision that should the government’s tax revenues for any reason decline, the tax floor would be adjusted downwards correspondingly. Triaca said that the clause was put in so that “the government cannot claim that we are going to undercut its finances.”
Perhaps surprisingly, Pitrola also considers the addition of a financial earnings tax “part of another discussion” which also included the gambling and mining sector and that it wasn’t necessary to include as part of the income tax floor debate. By the same token, he minimized the debate about recovering lost tax revenue by pointing to the “bonds issued for YPF, the negotiations with the Paris Club and the fact that money appeared for the teachers and police officers when they went on strike.”
It remains to be seen whether the negotiations behind the scenes produce a bill that can satisfy the wide diversity of thought in the opposition. Until then, it seems that clear that the government still has the strongest hand, as the opposition requires the FpV to agree to discuss the matter in Congress and the possibility of an adjustment by decree remains latent.
In any case, the opposition’s vow to bring the matter before a special session in the chamber every Wednesday has already met its first hurdle — the FpV has already booked the chamber to discuss the exemption of taxes on biodiesel products on Wednesday.