Argentina to end Income Tax as election spending spurs inflation

Argentina’s congress approved a bill that will eliminate income taxes for almost all formal workers, a measure poised to put more pressure on a ballooning fiscal deficit that’s underpinning 124% inflation before October’s presidential elections.

By a 38-27 vote, the Senate approved the legislation late Thursday advocated by Economy Minister and presidential candidate Sergio Massa, whose coalition placed third in the August primary vote. President Alberto Fernandez is expected to sign it into law. Argentines cast their ballots Oct. 22.

While Massa had already temporarily exempted 99% of salaried, payroll workers from income taxes by decree, the legislation permanently eliminates income taxes. Only workers who earn the equivalent of 15 federal minimum wages — 1.77 million pesos per month ($5,057) — will continue paying income taxes, a fraction of the workforce. To be sure, a new government takes office Dec. 10., and could reverse the measure.

As he cuts taxes, Massa is attempting to recoup lost electoral ground by spending heavily. He’s giving millions of informal workers handouts, increasing social security paychecks and upping salaries for public sector employees. All that, economists estimate, will cost 2 trillion pesos ($5.7 billion) that will be largely financed with central bank money printing that will fuel future inflation.

The lost revenue via income taxes, combined with increased fiscal spending, heightens risks to Argentina’s $44 billion program with the International Monetary Fund after Massa had committed to austerity in August.

“The recently adopted policy measures and announcements add to Argentina’s challenges,” IMF chief spokesperson Julie Kozack said at a press conference in Washington Thursday. “The economic situation remains very challenging and complex.”