Report Nº: 99520/12/2022
In a federal country, each province is the architect of its own development. That is why it is perverse to concentrate resources at the national level and then co-participate them among the provinces. It is key to eliminate co-participation and let each province collect on its territory the taxes it needs to promote its development.
In a federal organization, the development of the country is the result of the sum of the developments of each of its constituent States. Each constituent State is responsible for defining and implementing its own development policies, while competencies at the central level are limited to general issues such as ensuring macroeconomic stability, interstate services (such as energy production and transportation), defense, international relations, some regulations, interstate infrastructure (national roads, trains, waterways and area regulation) and social security.
Therefore, Argentina’s development depends decisively on the national State ceasing to restrict the possibilities of each province to work for its own development. This raises a rich agenda for the organization. One of the key points is fiscal correspondence. That is to say, to ensure that the provincial States obtain their income from the taxes arising from the economic activity that they collaborate in generating in their territory, as originally envisaged in the National Constitution.
How is public revenue currently generated? According to data from the Ministry of Economy it is observed that:
These data show a strong concentration of tax collection at the national level. This results in an exaggerated appropriation of resources by the national State which, in a federal country, is not the architect of provincial development. On the part of the provinces, more than half of the financing comes from co-participation. Co-participation, besides being complex and arbitrary, generates under-financing for the provinces and low fiscal correspondence, since provincial revenues do not come directly from their citizens. In addition to this, the minority part collected by the provinces is with taxes that are very harmful to development (sale tax and stamp taxes).
In view of the latter, in 2017 the Fiscal Consensus was signed. One of the main points was to agree on a schedule with ceilings on provincial sale tax rates, to limit the balances in favor of taxpayers, to eliminate the tax rate differentials between local taxpayers and taxpayers domiciled outside the province, and to homogenize the payment on account regimes applied by each province. Even if all the provinces had complied with it and the application of the schedule had not been suspended, the Fiscal Consensus has modest goals. It aspires only to moderate the damage caused by these harmful provincial taxes. The 2017 Fiscal Consensus was justified by the political weakness of the previous government, but in the face of the next government, it is not a solution.
To get out of the economic decline, more innovative and bold strategies need to be explored. Bad taxes need to be eliminated and not just to moderate their most harmful impacts. This can be achieved, for example, by creating a provincial VAT in which a large number of taxes currently levied on sales (VAT and national internal taxes, provincial sales and stamps taxes, and municipal taxes) are unified and collected by the provinces according to the sales generated in each province. Thus, the provinces will be encouraged to increase economic activity in their territory because that is the way to their financial sustainability.
Under this strategy, co-participation would no longer be necessary. Each province would be financed with the taxes it generates in its territory. This has to be complemented with a Convergence Fund. This is a mechanism for transferring resources from the richest to the poorest areas but, unlike what happens with co-participation, it would be aimed at stimulating policies to reduce regional development gaps.
