The Argentines are forced to do just that every time they use a credit card abroad or on a foreign website, the Associated Press reports. The government has imposed the tax in an effort to prevent its citizens from circumventing increasingly tight currency controls and protecting their wealth from rising inflation, we learn.
But why would we bother ourselves with some weird tax decisions taken in a country famous for its chronic mismanagement of the economy, you may ask. Well, I think that the Argentine government’s decision is nevertheless important, because it highlights some of the risks inherent in the ongoing global shift to a cashless society, where every single transaction can potentially be tracked. And, improbable as it may seem today, I am not at all confident that the U.S. government would never decide to do the same, whether it is for tax purposes or for some other reason. After all, the past decade has provided more than a few examples of previously unthinkable measures becoming all too real. So let’s take a look at what happened in Argentina.
15% Tax on Foreign Credit Card Transactions
Here is what the AP tells us about the new law:
One measure published in Friday’s official bulletin adds a 15 percent tax every time people make a purchase outside the country using a card issued by an Argentine bank. Another requires the banks to report every credit card purchase, home or abroad, to the tax agency.
It is the card issuers’ responsibility to “report in detail all purchases made by cardholders and their co-signers, starting in September, both within and outside the country”, explains Argentina’s top tax collector. The 15-percent tax will be added to the cardholders’ monthly bills and may be reimbursed to taxpayers whose declarations show that they’ve paid more than they owed in taxes for the previous year. However, such reimbursements, if due, would be made once per year and by then the soaring inflation may have eaten up the refund’s value.
Inflation protection is one of the two biggest reason Argentines have sharply increased their use of credit cards abroad. Officially, inflation in Argentina was 0.8 percent in July and 9.9 percent for the 12 months to July. However, no one actually believes the official figures. Earlier this year, the Economist published an excoriating report on the state of statistics in this country, declaring, among other things, the following:
Statistical offices vary in their technical sophistication and ability to resist political pressure. China’s numbers, for example, can be dodgy; Greece underreported its deficit, with disastrous consequences. But on the whole government statisticians arrive at their figures in good faith.
There is one glaring exception. Since 2007 Argentina’s government has published inflation figures that almost nobody believes. These show prices as having risen by between 5% and 11% a year. Independent economists, provincial statistical offices and surveys of inflation expectations have all put the rate at more than double the official number…
So Argentina is a bigger liar than Greece and China! According to Argentine opposition lawmakers, inflation in July was 1.76 percent and for the year to July — 24.13 percent. In any case, the high inflation has prompted Argentines to look abroad for safer havens for their money. The AP:
Purchases outside Argentina using peso-denominated cards soared 48 percent in June compared to the year before, obligating the central bank to send $289 million out of the country in just one month. Overall capital flight soared to $23 billion in 2011.
And the capital flight, in turn, has led to the increasingly tight currency controls imposed by the government. The AP:
Since November 2011, Argentina’s government has sought to stem capital flight by closing down nearly every avenue people have to legally trade their inflationary pesos for U.S. dollars. The black-market peso price has spiked as a result, trading now at 6.37 pesos to the dollar, compared to the official rate of 4.65. That 37 percent gap represents what people with undeclared pesos have to lose in order to convert their cash to dollars inside Argentina.
But what about converting cash to dollars outside Argentina? The AP:
Credit cards, meanwhile, are paid at the official rate, and many cardholders have figured out ways to use them to avoid this loss. The 15 percent tax raises the effective cost of purchases to 5.35, reducing the gap by nearly half.
In effect, the Argentine government is proposing to meet its citizens half way between the official currency rate and the real one.
So there you have it, a cat and mouse game, which the Argentine government is unlikely to win. There is a huge demand for dollars in the country and that demand will be met, one way or another. What the government will achieve, however, is that it will make life even more miserable for its poorer citizens than it already is, while making itself the laughing stock of the international community. Oh wait, it may be too late to worry about the latter outcome.
Image credit: Wicz.com.