Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

Tax reform can no more bypass fiscal federalism than Congress

Tax reform is absolutely inseparable from resolving the accumulated problems of federal revenue-sharing. The current federal revenuesharing legislation dates back almost three decades to 1988...

Sunday 8 October, 2017
President Mauricio Macri.
President Mauricio Macri. Foto:Cedoc.

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Dr Hale (the New England academic obsessed with the Argentine economy) rhymes with email and he has just sent me his umpteenth, which goes as follows:  “Hi, it’s me again taxing your patience (pun intended) with a new question. Here in the States tax reform was one of the few serious planks in Donald Trump’s platform last year and yet the full term of a pregnancy into his administration we still have no clear idea of what kind of baby is going to result – perhaps he finds it impossible to squeeze the details into a tweet even if doubled in size, I don’t know what his problem is apart from the obvious. If and when he gets his fiscal act together, he then has to push it through Congress where his record thus far is dismal despite supposedly comfortable Republican majorities. 

“But my question to you, as always, concerns Argentina. Your Mauricio Macri is more than a year deeper into his term than Trump and yet despite constant talk of upcoming tax reform and much sympathy expressed with business complaints that the tax burden is perhaps their biggest remaining obstacle to becoming competitive, I’ve no more idea where Macri is heading there than Trump.” 

My reply: 

“There are many variables to tax reform but I would like to focus here on just two factors, one of which will be resolved this month while the other runs much deeper. 

“As I’ve pointed out to you before, criticising Macri’s failure to define his new tax scheme (and this also applies to the labour reforms) is in some ways unfair because many of the finer points will hinge on the exact breakdown of the next Congress – Macri needs to know what he can and cannot get away with, Fiscal reform in particular cannot bypass Congress because the principle of “No taxation without representation” is sacrosanct – the Labour Ministry is already thinking of factoring its reforms into the next round of collective bargaining with the trade unions as the path of least resistance, ahead of braving all the Peronist variants in Congress. 

“But (and I cannot stress this point strongly enough) tax reform is absolutely inseparable from resolving the accumulated problems of federal revenue-sharing. The current federal revenue-sharing legislation dates back almost three decades to 1988 and stipulates that 56.6 percent of all shared revenues should accrue to the provinces with 42.4 percent going to the national government and the remaining one percent used to fund discretionary Treasury remittances. The distribution was entrusted to the national government, which abused that trust to such a degree that today it hogs around 70 percent of shared revenues as against 29 percent for the provinces – this has been a prime factor in Argentina becoming such a highly presidential democracy because overcentralisation has been fed by no less than 14 of the 23 provinces depending on the national government for two-thirds or more of their revenues. 

“The 1994 constitutional reform stipulated that the 1988 law should be updated by the end of the century and nor was this call abstract because already then there had been two enormous changes in the ground rules, both basically stemming from the introduction of convertibililty on April Fool’s Day, 1991. In order for the peso to have a chance of maintaining parity with the dollar, Domingo Cavallo needed to slash the fiscal deficit fast and one speedy way of doing that was to devolve all responsibilities for education and health to the provinces – in the following years when their share of revenues was dwindling towards little more than half of the statutory 56.6 percent, the provinces were thus saddled with a huge increment in their costs. 

“The other distorting factor injected in the immediate wake of convertibility was the Greater Buenos Aires compensatory fund, designed to offset that province receiving barely half of its 39 percent input into the national tax cake as well as that urban sprawl being the dumping-ground for the impoverished from elsewhere (and also ease then-vice-president Eduardo Duhalde’s ascent to Buenos Aires provincial governor). This fund was to be financed from 10 percent of income taxation with the Buenos Aires province share capped at 650 million peso/dollars with the rest going to the other provinces. Inflation since the end of convertibility in early 2002 has taken 10 percent of income taxation up to over 50 billion pesos but the Buenos Aires cap remains 650 million – that province is thus collecting little more than one percent of its own compensatory fund, which is patently absurd. 

“While previous dependent governors dared not raise this injustice with Kirchnerite presidencies, Buenos Aires Governor María Eugenia Vidal – as the golden girl of the opinion polls – is far more shirty on this issue and has taken her province’s case to the Supreme Court. The other provinces cannot really present any counter-arguments beyond their reluctance to lose several billion pesos – Córdoba and others claim that transport and utility bill subsidies have benefitted the Buenos Aires half of the country by a greater sum (up to 80 billion pesos) but since Macri’s plan is to slash or even virtually eliminate these subsidies, this is not really an argument. 

“Virtually nothing has been done in the intervening quarter-century to untie these federal revenue-sharing knots. A path forward is clearly needed but first it might be worth seeing if there is any way back to the original scheme. One way back would be to reverse the decentralisation of health and education to the provinces (as things now stand, national ministries are paying over 150 billion pesos of health, education, welfare and other expenditures which correspond to the provinces, strictly speaking). The other way back would be to pay the provinces the 56.6 percent of shared revenues to which the current law entitles them – this should cut enough slack to allow them to cede the Greater Buenos Aires compensatory fund to its intended recipient without losing themselves. 

“Both solutions collide with a national fiscal deficit of over four percent of Gross Domestic Product – the same factor which conspires against supplyside tax cuts in future reforms. 

“But whatever solution is found, it should boost provincial accountability and oblige governors to take responsibility for the solvency of their districts instead of being mere lackeys permanently angling for federal handouts.”


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