Argentina unveils tax cut proposals in pro-market reform drive

Argentina unveils tax cut proposals in pro-market reform drive

31/10/2017 18:35 - Emboldened President Mauricio Macri aims to boost country’s economic competitiveness

Buenos Aires

Argentina’s centre-right government unveiled sweeping proposals to cut taxes on Tuesday, in the first of a series of pro-market reforms expected to follow the ruling coalition’s victory in midterm legislative elections just over a week ago.

The proposals, which officials hope congress will approve by the end of the year, aim to reduce the tax burden by 1.5 per cent of gross domestic product over the next five years, as President Mauricio Macri strives to make Argentina’s economy more competitive.

Emboldened by a strong performance in midterms that left the opposition in disarray, Mr Macri called on Monday for an era of “permanent reform” in a speech before diverse representatives of society, including powerful regional governors, lawmakers, judges and business and trade union leaders.

The fundamental aim of Mr Macri’s reforms, which are also expected to include the announcement of an amnesty plan for informal workers soon, is to modernise Argentina’s economy and shrink the state so that its chronic fiscal deficit can be eliminated.

The tax reforms, inspired by successful similar reforms in Chile and Uruguay, were designed to make Argentina’s arcane and onerous tax code simpler, clearer and fairer, while bringing it into line with global practices. “We have a problem. We have to recognise this and we have to confront it,” Nicolás Dujovne, treasury minister, told reporters on Tuesday, arguing that the reforms would boost economic growth by 0.5 per cent per year for at least five years.

He said the reforms would stimulate investment, which economists argue is the key to unlocking sustainable growth. Investment accounted for just 15 per cent of GDP in 2016, but Mr Dujovne predicted that it would rise to 17 per cent in 2018, as confidence gradually returns after a decade of populism. Indeed, on Monday rating agency Standard & Poor’s raised Argentina’s long-term sovereign credit ratings from B to B+, citing higher investment and progress in improving competitiveness as factors that would help to sustain economic growth.

Mr Dujovne’s proposals include a reduction in taxes for businesses that reinvest profits from about 35 per cent to 25 per cent, and would see employer social security taxes slashed. But they would also add a 15 per cent capital gains tax on profits from foreign currency instruments and 5 per cent on peso fixed-income instruments.

The implementation of the proposed reforms over a five-year period corresponds with Mr Macri’s overall strategy of “gradualism” in rebalancing Argentina’s macroeconomic distortions, which is being financed by international credit to avoid austerity measures.

Indeed, Mr Dujovne explicitly recognised on Tuesday that the government’s objective of lowering the tax burden clashed with its other central aim of cutting the fiscal deficit, forcing both policy goals to be carried out gradually.

The tax proposals are the first of what is expected to be a series of announcements in the coming days, as well as the beginning of negotiations with regional governors over how to reduce and redistribute spending.

“For the first time Argentina is going to discuss an issue that it has never discussed before: how much we pay in taxes, how much we can reduce the fiscal deficit, how the state’s money is shared out,” said Carlos Pagni, a political commentator. “This [could be] what leaves Macri’s mark on history.”

Mr Macri also said on Monday that he would convene a commission to propose changes to Argentina’s pension system, and pledged to reform the justice system to combat corruption and increase its independence.

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