Tax amnesty: equity, efficacy and sustainability

Buenos Aires Herald. 30 de julio de 2016.

Prospects will only be good if the large fiscal deficit is tackled.

The whitewash will allow the government to have more funds as a result of the amnesty fines and uncollected taxes to be paid — there will be more tax revenue now and in the future. The higher tax revenue can alleviate the deficit or, according to the law, take a specific destination. The fact that many people consider that it is right and necessary to pay retirees does not mean that it is the best destination to kick-start the economy. Even so, and since that is the explicit destination, options like less funding or printing less money to fund the deficit are not considered.

There are at least three elements to analyze: equity, efficacy and sustainability.

Equity does not mean that all results are the same but all participants have the same opportunity. From the start, the amnesty lifts the differences between those who always paid and those who did not. In that sense it is unfair. However, equity highlights that participants have the same options and consequences. In that sense, the law is the same for everyone but the amnesty raises some inequities by providing various options. The rates are different depending on the type of assets declared and what is the destination of the funds. By this way, the government intends to encourage certain types of investments.

Efficacy will come from different things: the sum declared, the amount collected, the possible incentives to invest in the country and the future revenues. It is difficult to predict in terms of the amount and it is hard to know “what would have happened if” conditions had been different. It is assumed that the greater the sums declared, the more successful the amnesty will be. But it is not possible to say the same about the collection. Given the different tax rates, the same sums declared will have different expectations. For example, there is a trade-off in one of the options related to investing in a bond which will be held for seven years, with no tax. In that case, the government is considering its own cost opportunity: it will gain funds for a long zero rate period, while those who bring the money back won’t pay but cannot use the money.

Sustainability means that the amnesty will have a long-term effect. That situation will only happen if the tax structure and complexity changes. Taxes are not only high but very difficult to comply with. Considering the very high tax burden, the incentive to evade is important. Those who evade place those who pay their taxes at a disadvantage. Argentina has systematically made the mistake of taxing more those who have already paid on the grounds that they have them identified. It’s like hunting at the zoo.

How should the results be evaluated? By different numbers: the higher tax collection, the destination of the funds and the new tax base for the future. It will have effects, a one-off stock collection and then flow effects for future annual payments.

The highest collection will be an asset which will cancel a liability. To an accounting focus it seems harmless. But it is not. Definitely those who receive the funds (retired people) will be better off than before and Argentina will heal a fiscal situation which hid its true liabilities. Pensioners with a higher purchasing-power will certainly contribute to stepping up economic activity.

The amnesty will allow Argentine taxpayers to use their funds for several types of investments. The funds may be devoted to investments in Argentina and in other countries. That is, we don’t believe that Argentines who externalize their funds will invest in Argentina as the only possible destination. The amnesty will allow the state to collect more funds, but not necessarily identical to those brought back. However, the very low profitability in the OECD zone constitutes an incentive to declare the money in Argentina. It will not be easy to hide the money and, if so, it will be even harder to have profitability. The good news is that, if the economy improves, the funds will be available for domestic investment. But these prospects are not good if we continue with a large fiscal deficit.

We also have to consider that the National State has returned to the provinces 15 percent of shared revenue and there will be more minimum pensions. The sum of these effects is difficult to estimate but they clearly point to a big increase in spending, which will continue for many years. The money in the amnesty is so important for each person but a drop in the ocean for the State.

The fiscal needs are very big, and the consequences of the deficit are obvious: for 15 years Argentina consumed more than it produced (hence the fiscal deficit). It consumed its capital stock in all sect ors, affecting productivity and, therefore, diluting real wages. As long as the deficit persists, there will be no growth.

More than 200 years ago Adam Smith said: “No society can surely be flourishing and happy when the greater part of its members is poor and miserable.” If amnesty helps to reduce the deficit, it is very welcome.