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

Abstract

ABSTRACTThis 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).