Expansion of tax deductions in Peru: equity and economic challenges

The Economy Committee of the Congress of the Republic has recently approved a report proposing the expansion of tax deductions for Peruvian workers, with the aim of reducing the effective payment of Income Tax (IR). This proposal seeks to include seven new categories of expenses that can be deducted from total income, such as education, health, payment of interest on mortgage loans, food, child support, domestic or national air and land travel, and veterinary services, without modifying the current annual cap. The idea behind this measure is to promote the formalization of the economy and benefit the middle class of the country. However, Apoyo Consultoría has strongly opposed this proposal, considering it regressive and harmful to tax revenue. According to estimates by this consultancy, the implementation of these new deductions would reduce revenue by more than S/ 1.500 million per year, which would have a significant impact on fiscal accounts. One of the main arguments against this measure is that it would mainly benefit a minority with formal employment and high incomes, leaving out lower-income workers. According to data from the National Household Survey (Enaho), formal workers with higher incomes tend to spend more in designated categories such as health, education, or veterinary services, which would exempt them to a greater extent from paying taxes. Furthermore, it is pointed out that the Peruvian tax system already faces challenges in terms of revenue, with a low percentage of taxpayers actually paying Income Tax. Further reducing the tax base through new deductions would complicate the fiscal consolidation process, especially in a context of increasing fiscal deficit and pressure for higher public spending. In response to this situation, Apoyo Consultoría proposes to reduce the annual automatic deductions from 7 UIT to 4 UIT, including more workers in IR payment. They also suggest expanding additional deductions from 3 UIT to 6 UIT, while maintaining the current total maximum amount. These measures would focus on incentivizing the formalization of certain sectors and mitigating the regressive impact of the current proposal. It is estimated that if these suggestions are implemented, the percentage of workers paying IR would increase from the current 9% to 17%, and revenue would increase by more than S/ 5.000 million per year. However, it is emphasized that the implementation of these measures should be subject to a solid recovery of labor income, considering the economic impact of recent years in the country. In summary, the discussion regarding the expansion of tax deductions in Peru raises significant challenges in terms of equity, revenue, and economic formalization. It is crucial to find a balance that allows benefiting the middle class without neglecting the need to strengthen fiscal resources and ensure greater equality of opportunities for all citizens.