BUENOS AIRES, Dec 22 (Reuters) - Argentina's congress approved a reform to the country's income tax code on Thursday after President Mauricio Macri's government reached a deal with unions and governors to quash a competing proposal from opposition lawmakers.
Last month, Macri's center-right administration proposed a reform in line with its goal of trimming next year's budget deficit to 4.2 percent of gross domestic product. But in a rare show of unity, the lower house opposition passed its own version with far more generous tax cuts, forcing the government to negotiate.
The lower house passed the measure by a 166-5 vote, after it easily passed the Senate 55-2 on Wednesday.
Economists said the law passed on Thursday was closer to the government's original proposal than the opposition's project and would not threaten Macri's efforts to trim the 2017 deficit.
But the episode nonetheless unnerved investors by raising the likelihood that a divided Peronist opposition can unite to prevent Macri, whose "Let's Change" coalition lacks a legislative majority, from passing additional market-friendly reforms ahead of midterm congressional elections in October.
"With this law, investors discovered how vicious the Peronist part could be when they smell blood," said Jorge Piedrahita, CEO of broker Torino Capital. He noted that Macri remains politically vulnerable if he cannot revive an economy that is still in recession a year after he took office.
At issue in the income tax debate was how much to raise the minimum taxable income level, as rampant inflation seen at 40 percent this year and 20 percent next year has eroded Argentines' purchasing power.
The law passed on Thursday raises the minimum taxable income level by 23 percent to 37,000 pesos ($2,377.93) a month for a married couple with two children, more than the government's initial proposal but less than the opposition plan. The government will make up for some of the shortfall with a tax on gambling.
The revised law will reduce government revenue by 7 billion pesos ($443.88 million) next year compared with the initial proposal.
While not disastrous, the rise in interest rates globally has raised the stakes for Macri's ability to meet fiscal targets, said Marcos Buscaglia, founding partner at consultancy Alberdi Partners in Buenos Aires.
"The financing of 2017 is an uphill task," Buscaglia said. "They still have to issue a lot of bonds, and the international situation has become more challenging." ($1 = 15.7700 Argentine pesos) (Reporting by Luc Cohen and Buenos Aires newsroom; Editing by Dan Grebler)