Argentina - Tax policy for stabilization and economic recovery

Refort No. 8067 AR Argentina Tax Policy for Stabilization and Economic Recovery November 8, 1989 Latin America and the Caribbean Region Country Operations Department IV FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not odwrwise be disclosedwithout World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Austral Official Exchange Rate, November 1, 1989 US$1.00 - A$650 1.00 A$ - US$0.0015 Parallel Exchange Rate US$1.00 - A$710 A$1.00 - US$0.0014 FISCAL YEAR January 1 - December 31 GLOSSARY CUIT Codigo Unificado de Identificacion Tributaria (Unified Taxpayer's Identification Code) DGI Direcci6n General Impositiva (General Tax Directorate) EEC European Economic Community FONAVI Fondo Nacional de Vivienda (Housing Fund) GdE Gas del Estado (National Gas Company) OECD Organization for Economic Cooperation and Development VAT Value-Added Tax YPF Yacimientos Petroliferos Fiscales  iURI I ALt, ONLY PREFACE This report is based on the findings of a World Bank mission that visited Argentina between April 17 and May 5. The mission comprised the following members: Luca Barbone (Mission Leader) Jaime Vazquez-Caro (Tax Policy and Tax Administration) Jorge Mac6n (Tax System and Income Tax Issues) Jos#-Manuel Gonzalez-Paramo (VAT) Miguel-Angel Lasheras (VAT) Alberto Porto (Provincial Finances) Contributions were also received from Guillermo Perry (Taxation of Energy Products); Michael McKee (Effective Tax Rates on Capital Income); Richard Bird (December 1988 Tax Reform). The report benefitted from the studies produced by the Tax Policy Group (Public Sector Technical Assistance Loan, PSTAL AR-2712), under the direction of Juan Carlos Gomez-Sabaini. Particular thanks are due to i!iviana Duran. Research assistance was provided by Gy6zo Gabor and Roberto Manrique. Invaluable secretarial support was given by Lien-Hiep Nguyen and Francine Coscolluela. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS Page Nos. GLOSSARY OF ACRONYMS COUNTRY DATA EXECUTIVE SUMMARY ......................................... i - xii CHAPTER I: MACROECONOMIC PERFORMANCE AND THE TAX FINANCING OF GOVERNMENT EXPENDITURES ..... 1 it. Fiscal Instability and Tax Revenues ... 1 B. Macroeconomic Developments and Aggre- gate Revenue Performance ............ 10 CHAPTER II: THE TAX SYSTEM: BETWEEN MODERN TAXES AND TAX HANDLES ......... ..................... 18 A. Overview: The Structure of the Tax System ............ .................. 18 B. Modern Taxes and Tax Handles 23 C. Tax Policy: The Growth of Tax Expendi- tures ........ . 26 D. Efficiency and Equity Aspects of the Tax Svstem .30 E. Tax Policy: 1984-88 .34 CHAPTER III: TAX ADMINISTRATION .......................... 40 A. Administration and the Legal Tax System 40 B. Administration and Substantive Tax Law ................................. 43 C. Individual Compliance: Procedural Laws 45 D. Administration: The Internal Organi- zation Laws . .49 E. Administration: How Has DGI Fared? 53 F. Recommendations . .61 CHAPTER IV; REFORMS FOR STABILITY AND GROWTH IN THE 19909 66 A. Tax Reform: Main Lines of Action 66 B. Direct Taxes: A Proposal for Funda- mental Reform .68 C. Generalization of the VAT .81 D. Taxation of the Energy Sector 91 E. Emergency Tax Measures and the Imple- mentation of the Reform .94  TABLE OF CONTENTS (Continued) Page Nos. CHAPTER V: FEDERAL-PROVINCIAL FISCAL RELATIONSHIPS ..... 97 A. Revenue Sharing ...... ................. 97 B. Owr. Revenues of Provincial Government 105 C. Decentralization of the Tax System 109 APPENDICES: 1.1: Tax Revenues, Output and Inflation 117 2.1: Evaluating the Tax Burden in Argentina .120 2.2: Marginal Effective Tax Rates on Capital Income .123 4.1: Adjustment for Inflation .132 4.2: Taxation of the Energy Sector - Alternative Scenarios .136 REFERENCES .142  COwrRY DATA - ARGENTINA AREA POPULATION DENSITY a/ 2;66.9 thou&. sq.km. 32.0 mi lion (1988) 10.7 per eq.kh 1 5t nnual groeth 16 9 per eq km of *,able land POPULATION CHA' _TERISTICS a/ HEALTH b/ Crude Birth Rat. (per 1000) 23.6 Populatson per physician (thous ) 0.5 Crude Death Rote (Per 1000) 8 9 Population per hospital bed (thou.s.) 0.2 Infant Mortality (per 1000 liv- births) 34.4 INCOME DISTRIbUTION b/ DISTRIBUTION OF LAND OWNERSHIP 1 of national incoms. Nighest quintile 50 37 # oamed by top 106 of lend osners 6 of national income, loseat quintile 4.4% k o.ned by seallest 101 of land o-ne ACCESS TO SAFE WATER (1980) ACCESS TO EL'CTRICITY (1989) 6 of population - urban 65$ J of population 956 9 of population - rural 17J NLTRITION a/ EDUCATION Calorie intake s S of requirements 119.2% Adult literacy rate X (1980) 95t Per capita protein intake (grams per d-y) 99.7 Primary school enrollvent S a/ 100% GNP PLR CAPITA IN 1988 c/ 7'537 CROSS NATIONAL PRODUCT IN 1988 d/ _______________ ---