``Bye Bye Cascada:'' Replacing Turnover Taxes with Subnational VAT in Argentina. An Interregional Input-Output Analysis.
Using a multi-regional input-output model, this paper quantifies the cascading burden of Argentina's provincial turnover tax (Ingresos Brutos), revealing that its effective rate is nearly double the statutory average and proposing revenue- and welfare-equivalent subnational VAT rates to guide a reform that shifts from an origin-based to a destination-based taxation system.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the complex machinery of a modern economy, taxes are the invisible gears that keep the government running, but they can also jam the works if they are designed poorly. One specific type of tax, known as a turnover tax, is levied on the total value of a sale at every single step a product takes from raw material to the final customer. Imagine a loaf of bread: if a tax is charged on the wheat farmer, then again on the miller who grinds the wheat, again on the baker who makes the dough, and finally on the shopkeeper who sells the loaf, the tax gets stacked on top of itself. This stacking creates a "cascade," where the final price the consumer pays includes not just the tax on the bread itself, but a hidden accumulation of taxes paid by everyone who touched it earlier. This structure distorts the economy, encouraging companies to merge vertically to avoid paying the tax at each step, and making it harder for local producers to compete with foreign goods that do not carry this hidden burden.
Argentina has long relied on such a system for its provincial governments, using a tax called Ingresos Brutos. While this tax provides essential revenue for the twenty-four provinces, its cascading nature has become a significant barrier to trade and efficiency. As the country considers a major overhaul to replace this system with a modern value-added tax—one that only taxes the final sale and credits the taxes paid along the way—policymakers face a difficult question: what rate should the new tax be to replace the old one without causing a fiscal crisis? The answer is not a simple number found in a ledger, because the old tax is embedded in the economy in complex, invisible ways. To find the answer, a team of researchers built a detailed digital map of the entire Argentine economy, tracking how money and goods flow between five major regions and twenty different industries.
The researchers, Gabriel Michelena, Pedro Elosegui, and Marcos Herrera-Gómez, used this map to trace the true cost of the old tax system. They calculated that while the official tax rate on average is just under 3 percent, the actual burden hidden in the final price of goods is nearly double that, at 5.4 percent. This gap exists because the tax accumulates as goods move through supply chains. For some industries, particularly agriculture and mining, the effect is even more dramatic. A statutory rate of less than 1 percent can effectively become a 6 percent burden by the time the product reaches the consumer, simply because the inputs used to make it were taxed at every previous stage. The study reveals that this hidden tax acts as a penalty on exports, as foreign buyers will not pay for the extra cost that Argentine producers cannot pass on to them.
To solve the puzzle of replacement, the team calculated two different rates for a new, fairer tax system. The first rate, which they call the "welfare-equivalent" rate, measures the tax burden actually felt by local families buying goods for their homes. Across the country, this rate is approximately 6.2 percent. However, this number does not tell the whole story. The second rate, the "revenue-equivalent" rate, asks how much tax is needed to replace all the money the government currently collects, including the taxes hidden in goods bought for investment, government projects, and exports. Because the new system would stop taxing exports (to help them compete globally) and would not capture the same revenue from business-to-business transactions, the government would need a higher rate to make up the difference. The researchers found that to keep the government's budget balanced, the new tax rate would need to be 8.7 percent.
The study also highlights a crucial geographic reality. The central region of the country, known as Pampeana, generates nearly 78 percent of all the tax revenue under the current system. This is not just because the region is wealthy, but because the current tax rules favor the place where goods are made rather than where they are consumed. If Argentina switches to a system where the tax goes to the place where the final customer lives, the flow of money would shift. The researchers found that every single region in the country currently collects more tax than its own local consumption would generate under the new rules. This means that a simple switch would leave a massive hole in the budget—about 318.8 billion pesos nationally—unless the government either broadens the tax base to include more types of spending or creates a system to transfer money between regions to smooth the transition.
The analysis also accounts for the reality that not everyone pays taxes. In the informal economy, where transactions happen off the books, the tax is not collected. The researchers estimated that if they adjust for this hidden economy, the required tax rate to maintain current revenue levels would rise even further, potentially reaching between 11 and 12 percent depending on how much informal activity exists. This suggests that the gap between the current system and a fair, efficient one is wider than it appears on paper. The study concludes that while replacing the cascading tax is necessary to unblock the economy and help exports, it is a delicate operation. The new tax rate must be high enough to fund the government, but low enough to avoid crushing consumers, and the transition must be managed carefully to ensure that no region is left without the funds it needs to function. The researchers have provided the precise numbers needed to design this transition, turning a complex economic problem into a clear set of benchmarks for the next generation of fiscal policy.
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