Will that be cash or credit? Payment preferences and rising VAT in Argentina

ABSTRACT

This article studies how Argentina’s value-added tax (VAT) revenue has risen to historic highs since its 2001 sovereign default and continues to grow despite unchanged VAT rates, slow economic growth, stagnant household consumption, and low commodity prices after 2010. In 2015, VAT revenue accounted for one-quarter of all tax revenue in Argentina. We show that Argentina’s banked population went from less than 41.6% in 2003 to 89.6% in 2016. Consequently, there was significant growth in electronic payments via credit cards and debit cards. Using time series regression, the authors show that the rising banked population and card growth is correlated with VAT-to-GDP increases from 2002 to 2015. The authors posit that one reason for these correlations is that some consumption is shifting from informal (harder to tax) markets to formal (easier to tax markets) as cash use declined and card use grew. Also, rising electronic payments likely explains improved VAT compliance as well—the Argentine VAT noncompliance rate averaged 36.4% between 2000 and 2005 but improved to 20.5% between 2006 and 2010 (Trigueros, Longinotti, & Vecorena, 2013).

KEYWORDS:

• Argentina
• banking
• credit cards
• informal market
• value-added tax

JEL CLASSIFICATIONS:

• H2
• H31
• G21
• E2

Notes

¹On June 28, 2017, the Macri government announced it intended a major tax reform by the end of 2017. One option called for raising the standard VAT rate from 21% to 25% and eliminating all income taxes.

²Melo (2007, p. 115) compared 24 similar income countries between 1961 and 2003 and found Argentina with the lowest tax-to-GDP ratio. Teera and Hudson’s (2004, Table 1) study of average tax-to-GDP ratios from 1975 to 1998 includes Argentina (9.9%), Brazil (17.2%), Venezuela (17.4%), Chile (20.9%), and Uruguay (24%), and among all upper middle-income countries in the world Argentina ranks only ahead of Bahrain (7.5%).

³A general VAT rate of 21% is applied on products, services and imports but not exports. Bread, water and milk are exempt from VAT and other basics have a 10.5% VAT rate. Excise taxes are applied to a range of products (tobacco, wines, soft drinks, cosmetics, jewelry, etc.) at rates ranging from 8% to 20%—tobacco (60%) is an exception.

⁴VAT revenue collected at the customs house as a percentage of total VAT revenue dropped from 42% in 2008 to 28% in 2015, meaning historic VAT-to-GDP rises in this period had to come from internal VAT collection. The puzzle is how this occurred given stagnant household consumption and economic growth and unchanged VAT rates.

⁵Boadway and Sato (2008) noted those who favor trade taxes over VAT stress the fact that the latter does not tax informal consumption, which can incentivize less formal consumption. In turn, trade taxes are easier to collect and harder to skirt (see Emran & Stiglitz, 2005).

⁶In 1975 Argentina’s VAT replaced a host of retail sales taxes that appeared in the 1930s when traditional trade tax revenue collapsed. As a percentage of total tax revenue, retail sales taxes accounted for 19.3% in 1966, and VAT accounted for 19.0% in 1978 and 18.9% in 1985 before virtually collapsing in 1989 (World Bank, 1987). VAT in Brazil and Chile also replaced retail sales taxes yet as a percentage of total tax revenue the ratios in these countries climbed in the 1970s and 1980s.

⁷The 1990 reform follows the recommendations of a World Bank (1989, p. 67) assessment team in the country in 1989: “The VAT would be generalized to all goods and services, at a uniform rate, which could be the present 15 percent or the 18 percent prevailing until August 1988.”

⁸In 2010, 28.8% of children under 18 were covered by the Universal Child Allowance, a CCT program targeting the poor and informal sector workers that grew rapidly after 2001. Other CCTs covered a further 7% of the population. No Latin American country expanded CCTs faster than Argentina between 2005 (1.12 million people) and 2010 (11.79 million people). Argentina expanded pension coverage after 2003, renationalized pensions in 2008, and extended pension coverage to informal workers. In 2005, 30% of retirees had no access to the pension system, the figure dropped to 10% by 2012. Today, Argentina has the highest coverage in Latin America. Direct deposit is used for CCTs and pension payments.

⁹Data on card ownership is only available annually and starts in 2002. Card spending data is also annual and is available starting in 2007. Therefore, our models are limited to sample sizes of 14 (years) for Models 1–4 and 8 (years) for Model 5.

Additional information

Notes on contributors

Kenneth Mitchell

Kenneth Mitchell is an associate professor of Political Science at Monmouth University.

Robert H. Scott

Robert H. Scott, III, is a professor of Economics & Finance, Monmouth University, West Long Branch, NJ.