In his speech at the Industrial Union of Argentina, President Macri repeated what he had already stated in his last nation-wide address: the need to create a withholding tax on exports. Despite the fact that, as he declared, he thought it wasn’t the right choice, he said he was forced to do so due to the circumstances and the commitments taken —and yet to be fulfilled— with the IMF.
How Did We Get Here?
Why does this administration adopt a measure considered bad? And above all, why do they do it, when their vision for the country was the opposite and when they have already cut on deductions to certain agricultural and mining products?
Like the President himself said: things happened. Among the many things that have happened, one that I think it’s worth mentioning has to do with economic goals and the constant failure to meet them.
- On December 27 2017, the Congress passed the law for the 2018 budget, which projected an annual growth of 3.5% of the GDP, a 12% increase in investment and an annual rate of inflation of 15.7%. The government claimed that such an inflation rate was quite pessimistic, that it was only for the purpose of planning the budget. In reality, they hoped it to be between 8% and 12%. However, the following day, the President of the Central Bank at the time, the Minister of Internal Revenue, the Cabinet Chief of Staff and the current President of the Central Bank shared in a press conference their decision to consider an inflation rate of 15% because it was more realistic.
- By the end of August, most analysts were saying that the probability was for the economy to contract 2.4% —far from the projected growth of 3.5% (we are talking about a difference of six points of the GDP, that is, more than USD 30 billion), and that the inflation rate wasn’t going to be between 8%-12%, not even 15.7%, but closer to 42%. And that’s not all. Surely, the worst thing for the industry is something rarely seen before: the Central Bank has set the bank rate at 60%, the highest in the world, and the gap with the rest of the countries is alarming (it triples the current bank rate of Venezuela, for example).
All of this has many negative impacts. The difference between the goals set and the ones actually met in eight months is huge and the impact on the real economy and the life of millions of Argentinians will be even stronger during the remaining months of this year, and for much of the year to come. Consumption is expected to fall 4.7% which, combined with the high bank rate and an indomitable inflation, results in the worst scenario possible for small- and medium-sized companies.
What’s the Government’s Proposal?
Their main goal is to bring the primary fiscal deficit down to zero, until an equilibrium is reached by 2019. To accomplish that, the government has proposed to implement a withholding tax scheme on exports, tightenings in public expenditure, cuts in subsidies to services and transport, and a request to the IMF for more money, in order to guarantee that the fiscal goals that are worrying the market are met and to help reduce the country risk and stabilize the situation with Argentinian bonds.
This proposal is based on a belief that a large part of the Argentinian society holds: that the primary fiscal deficit is our biggest problem and that we spend more than we generate.
Exports deductions are expected to yield ARS 280 billion during 2019. In addition, as part of the austerity plan, the Ministry of Science and Technology will be debased to a Department dependent on the Ministry of Education, a huge setback to add to the continuous budget cuts on scientific research that this administration has executed.
The new goal is an idea exclusively of this administration, whose performance has been very poor and whose contradictory proposals haven’t brought any kind of benefit to the country. It isn’t an external imposition nor part of a plan agreed with any financial body; it’s a decision made by this administration based on the theory that if they bring about the desired equilibrium one year before planned, that will create confidence and, in turn, will promote investment, as the only possible way out.
Why Do We Think These Ideas Are Wrong?
Following the theories of the economist, engineer and businessman Marcelo Diamand, we believe that both the diagnosis and the solution are mistaken. Most of the developed countries we aspire to resemble are investing increasingly more in I+D. That is essential to industrial growth, and we don’t know any exceptions to the rule. Without investment in knowledge, there are no companies nor exports able to help the country make the leap.
- Below is a chart representing the evolution of I+D investment in some countries since 1970. The path to follow seems pretty clear to us.
We don’t believe that cuts should be made in areas of higher education (for the first time in many years, 57 public universities didn’t begin classes in the second semester of 2018), nor should we compromise the future of the nation by cutting on research and development.
- In relation to exports, deductions are taxes on commercial activity, which should be encouraged instead. Again, our country punishes businesses instead of trying to obtain funds from where developed countries do.
- In 2017, Argentina had a negative trade balance of USD 8.471 million, the worst figure in its entire history. Far from being a minor problem, it is more serious than fiscal deficit.
- We are wasting a historical opportunity to join the region’s growth path. Due to the global situation, most countries’ exports have increased at almost two-digit rates, and more than 9% in all South American countries.
- For exports, instead of a percentage, a fixed withholding tax was set, with the direct consequence that with a higher exchange rate the tax is diluted. Thus, agriculture companies feel motivated to speculate even more with the selling off of their revenue in dollars.
The aim of this article is to suggest alternatives to the measures that we think are misguided, avoiding criticizing without offering a solution. Although we think model countries are the ones that have achieved a balance between socialism and capitalism, resulting in high levels of development, according to the UN (like Norway, Switzerland, Sweden, Germany, Denmark, the Netherlands, Canada), we are going to analyze one country that defenders of the current measures feel passionate about, whose exporting capacity is enormous: the United States. The comparison may seem a bit odd, but for our purposes, any developed country is a useful guide to put our country in the right direction.
With a high deficit and a negative trade balance, if we want to invest in development, research, education and, at the same time, promote domestic consumption, what magical solution could we emulate from our American friends?
- Reduce taxes on commercial activity and increase taxes on wealth. That’s the exact opposite to what has been done and is promoted by this administration. In the US, the tax on inheritance is quite significant: it is set at 35% at federal level. Depending on the state, property taxes can be up to 2% of the real value of the car, house, or share, something that could be the key to national tax collection: to remove outdated and absurd fiscal valuations of assets. Although since the second half of the 70s taxes on property ceased to be the ones that created more revenue, they are still very important to the country’s finances (in many cases, they account for more than 11% of the GDP).
Macri’s administration is very far from meeting its promise of reducing the income tax, but one of its accomplishments has been to make the tax on wealth practically irrelevant, something that all politicians have chosen to ignore. In the midst of cuts and economic downturn, nobody is talking about the need to implement a progressive tax scheme that truly helps the country make progress without cutting where it harms the social fabric the most. To better understand something that isn’t discussed very often, and to put it in David Cufré’s words, “the lower collection levels of this tax are a result of the government’s decision to progressively reduce the taxation fee. For fiscal period 2016, the fee was downgraded from 1.25% to 0.75%, then to 0.50% in 2017 and finally to 0.25% in 2018.” We hope that brings clarity to the matter. Members of the Macri, Peña Braun, Bullrich, Aranguren, Dujovne, and Caputo families, among others, are paying significantly less taxes, and are asking small business owners to bear all the costs in these times of crisis. Under no circumstance can they, who are not in the export business, who do not generate true revenue in the country —but rather, who sneak out laundered money abroad, to fiscal havens and the like—punish those who export know-how nor reduce the very taxes they ought to pay.
What Could We Suggest and What Could the Industry in General Do?
The solution is a growth model based on know-how. We can definitely give our support and bear the costs in a situation like this, but we must establish our differences with the current economic model and the project for the country. The failure to do so means to become an accomplice of a historical ransacking of the human, technological and symbolic resources of our nation.
We must demand, fight for, put forward models that promote three fundamental aspects:
- Creation of international patents developed in Argentina
- Export of the product offer of our country
- Growth of our industry
Personally, we have founded a company that now employs 197 people and expects to make USD 8 million in profits and to export 85% of our designs to the most competitive market in the world: Silicon Valley. Every dollar we export represents 100 times more investment and 1000 times more effort than any peso we earn. Our biggest global accounts and even the sale of a stock of shares to a European investment fund have been the result of intensive money investments coming from the company’s surplus —returns that weren’t divided among partners so that we could further internationalize the company.
At intive-FDV, a company with 1700 engineers and 17 offices around the globe (in Munich, San Francisco, London, Stockholm, among others), we are able to measure the global demand of our services through Machine Learning algorithms developed in-house, and not only do we export what we create, but our internationalization and demand generation strategies are models to follow in countries like Germany and Poland.
As an industry, we need to create patents and export them, we need to design real strategies to make this industry and others grow, we need to commit ourselves to further improving our business models, we need to invest more and travel more. Undoubtedly, that is costly and demands a lot of effort, but it is our duty as businessmen to bear the costs.
Lastly, we would like to say that we believe that, in a rational tax scheme, those who have a greater income should pay much more than those with less. There is no doubt that the right path is to implement progressive taxation —for example, to personal property— using real estimates rather than fiscal valuations. That demands a bigger effort from people and companies like us but will result in a higher tax collection: today we need genuine revenues in dollars to invest in research, education and health. Solidarity is key to build a better society together.