Taxes in Argentina are so high that they drive workers and businesses out of the legal economy. Javier Milei was elected with the promise of ending chronic deficits, taming inflation, and restoring growth. He quickly delivered on the first two points of that promise. Monetary stability and fiscal balance were necessary conditions for growth, but they are not sufficient to restore Argentina’s legacy as a prosperous society.
The real obstacle preventing sustained growth is a tax system that suffocates formal activity and pushes nearly half of the workforce into informality. Of the 155 taxes that fall on businesses and families, just seven account for 87% of total revenue. The World Bank has estimated that these overlapping taxes create an average effective burden exceeding 106% of the earnings of a typical business. This is the second-highest effective corporate tax rate in the world, behind only Comoros, a tiny island nation off the southeast coast of Africa. This level of taxation destroys any incentive to invest or undertake entrepreneurship and makes full compliance impossible.
Employer and employee social security contributions together amount to between 35% and 41% of wages. On top of that, registered workers must pay income tax. These levies create a tax wedge that leads many workers to conclude they can improve their take-home pay by accepting informal arrangements and hiding their income, even if their nominal wages are lower than those of registered, taxpaying workers.
Millions of Argentines have taken refuge in the margins of society to escape these overlapping taxes, emptying the tax base. According to data from the National Institute of Statistics and Census (INDEC), 44.1% of the employed population works in the informal economy. While this may be a rational choice in the face of such perverse incentives, the resulting macroeconomic structure limits opportunities for growth. Informal or non-compliant companies have limited access to credit and few incentives to invest in machinery or train workers, since their main goal is to conceal their activity.
Our research compares INDEC household survey data with variations in provincial gross receipts taxes and shows that higher tax pressure is strongly associated with increased labor informality. In construction, for example, each additional percentage point of taxes corresponds to an 8.5% increase in informality, even after accounting for mitigating factors. This means that every tax increase generates less total revenue because people shift to informality very quickly. In theory, tax cuts could also increase public revenue if households and businesses respond by returning to compliance.
Lowering taxes does not have to be an act of faith. Lawrence, the lead author, recommends a gradual, data-driven approach to tax reform that gives the private sector time to respond before moving to subsequent phases. This approach ensures the stability of public revenue while the tax structure gradually becomes simpler and more rational.
Phase 1 would replace provincial gross receipts taxes with a simple consumer sales tax and reduce the national VAT to 10% in a revenue-neutral manner. At the same time, the revenue-sharing system should be restructured to align spending authority with the political responsibility for raising revenue. Provinces would directly administer and collect many of their own taxes, and some benefit from a transitional stabilization fund to maintain current revenue levels. Milei recently discussed this idea in broad terms.
Phase 2 would progressively eliminate distortive taxes on trade so that Argentina can integrate into global markets. Phase 3 would implement longer-term rate reductions on income tax and social security contributions.
Along with these reforms, the tax amnesty program included in the labor modernization law passed in March 2026 will be a key catalyst for bringing Argentines back into the formal economy. The amnesty allows a company that hires a new registered employee on whose behalf no social security contributions have been made in the last 12 months (an indicator of prior informality) to pay only 2% in employer contributions for up to four years of that employee’s formal employment.
Together, these changes could bring Argentines out of the shadows where they hid from an unworkable tax regime. More fundamentally, they could represent a profound cultural shift, because Argentines would no longer feel compelled to conceal their lives and their income. Mutual trust could once again become a defining feature of Argentine life.
Argentina was once one of the richest countries in the world. It can be again. It only needs the right policy environment.