FISCAL CORRESPONDENCE INSTEAD OF TAX CO-PARTICIPATION

Tax collection is strongly centralized at the national level while the main public functions are administered by the provinces and their municipalities. Therefore, part of the taxes collected are appropriated at the federal level and the rest is distributed among the provinces. For this redistribution, a series of rules set in the co-participation law is applied. The scheme is so complex and arbitrary that it is colloquially called the “co-participation labyrinth”. 

Historically, co-participation has been a source of conflict and controversy. The most extreme evidence is the large number of lawsuits filed before the Court by provinces that feel they have been wronged. The most recent case is Mendoza, which is challenging the reduction of income tax unilaterally imposed by the national government. At the same time, the governors of the north are alarming their populations with the threat that if the co-participation decreases, they will not be able to pay the salaries of public employees.    

Why does co-participation generate so much controversy? Although it is a subject that involves many complexities, based on information published by the Ministry of Economy, referring to 2022, some evidence can shed light on this issue:

• The northern provinces receive in co-participation USD 2,000 per inhabitant per year.
• The rest of the provinces receive USD 900 per capita per year.
• The northern provinces have 63 public employees per 1,000 inhabitants while the rest of the provinces have 45 public employees per 1,000 inhabitants.  

These data show that the co-participation redistributes tax resources in favor of the northern provinces, which use them to expand public employment. The evidence supports the northern governors’ claim that, if co-participation decreases, they will not be able to pay salaries, since there is a clear excess of public employees. They also explain the rejection generated by the co-participation among the provinces that put more money than they receive through co-participation proposing its judicialization.

Co-participation is one of the main causes of Argentina’s decadence. To the provinces of the center and Patagonia it imposes a drain of resources that curtails their progress. Paradoxically, it also curtails the possibilities of progress in the northern provinces. The abundant resources received by the northern provinces are mostly destined to spurious public employment and other clientelistic practices. Co-participation is not a tool of solidarity from the richest to the poorest areas. On the contrary, co-participation deepens their underdevelopment through the incentives it generates in their governments to accumulate political power based on clientelism. 

The solution is to apply the principle, widely supported by the theory of Public Finance, of fiscal correspondence. That is, the level of government who spends, must collect the taxes. This requires a new tax and functional coordination agreement between the provinces and the Nation. The national State should be financed with taxes on foreign trade, social security, and income tax. The provinces with their municipalities with a VAT that absorbs provincial and municipal taxes on sales. The AFIP should continue to administer the unified VAT, but instead of distributing it by applying the co-participation rule, it should do so according to the production and consumption of each province. This new rule would encourage local development. The northern provinces would receive assistance from a Convergence Fund until they achieve a level of development similar to the rest of the country. 

The northern provinces use the funds to expand public employment and not to promote development because of the poor co-participation incentives. Likewise, judiciality is intrinsic to co-participation. The proof is that in much of fiscal pacts, commitments were made not to file lawsuits between the provinces and the Nation, however, lawsuits abound. For this reason, fiscal correspondence will generate better incentives because it induces good administration since it imposes accountability of public spending to taxpaying citizens.