Proposal to expand tax deductions sparks economic debate in Peru

The Economy Commission has recently approved a report that aims to introduce new categories of expenses that can be deducted from the total income of workers to reduce the effective payment of Income Tax (IR). Currently, in Peru, it is allowed to automatically deduct 7 UIT (approximately S/ 36,000 annually), thus exempting the first S/ 2,500 monthly of income from the IR tax under the premise that they are used to cover basic needs. In an attempt to formalize the economy, additional deductions of expenses of up to 3 UIT per year (more than S/ 15,000 additional) were included in December 2016. However, it is now intended to add seven additional categories to these deductions, including items such as education, health, payment of interest on mortgage loans, food, alimony, domestic air or land travel, and veterinary services, while maintaining the annual limit. Although the intention behind this measure is to increase formalization and benefit the middle class, there are various critical voices regarding it. For example, Apoyo Consultoría has rejected the proposal considering that it would have a regressive impact by exempting from tax payment to a greater extent those workers who spend the most in the designated categories, who are usually those with higher incomes. Fiscal policy aims to redistribute wealth to ensure greater equality of opportunities, by taxing those who earn more and allocating those resources to transfers, services, and infrastructure to benefit the most vulnerable population. However, this proposal would reduce tax collection from higher-income workers, thus decreasing the resources available for the most in need. According to the National Household Survey (Enaho), formal workers with monthly incomes above S/ 9,500 spend double on items such as health, education, mortgage loans, and veterinary services compared to those in the lowest income bracket. This suggests that the proposed measure would disproportionately benefit higher-income workers. Furthermore, the implementation of these new deductions would reduce effective tax revenue by more than S/ 1,500 million annually, representing 0.2% of the GDP. This would add to the existing pressures on fiscal accounts, in a context where the fiscal deficit already reaches 3.9% of the GDP. Apoyo Consultoría proposes to reduce the automatic deductions from 7 UIT to 4 UIT annually, in order to include more workers in the payment of IR. Likewise, it is suggested to expand the additional deductions from 3 UIT to 6 UIT, while maintaining the current maximum total amount. According to Apoyo Consultoría's estimates, these measures would increase the percentage of workers paying IR from the current 9% to 17%, and revenue would increase by more than S/ 5,000 million annually, equivalent to 0.6% of the GDP. It is proposed that the implementation of these measures be conditional on a solid recovery of labor income, following the economic impacts of recent years. At a time when fiscal consolidation is crucial, the discussion on fiscal deductions becomes relevant. The need to balance tax collection with public spending and resource redistribution presents itself as a key challenge in the pursuit of a fairer and more equitable tax system for all Peruvians.