OMNIBUS LAW SHOULD ADDRESS THE TAX SYSTEM DISORDER

The government of La Rioja issued a quasi-money to pay the salaries of public employees. It consists of provincial public debt securities that can be used for commercial transactions as if it were money. It is not a legal tender (which only the national government can issue) but it has similar functionalities.

Quasi money tends to depreciate against the peso. The magnitude of the loss of value depends on the amount of the issuance. Thus, if the provincial government maintains over time the strategy of covering its imbalances by issuing quasi-money, the rate of depreciation will be increasing. The main effect is that those who receive payments in quasi-money from the provincial government, in addition to the deterioration caused by inflation in pesos, will suffer the loss generated by the fall in parity. The impact on the economy and the social situation in the province will be very negative. 

What does the evidence say about the argument of the Governor of La Rioja that the origin of the problem is the insufficient transfers from the Nation? According to information published by the Ministry of Economy for the year 2023 it is observed that:

• The Argentine provinces as a whole received from co-participation $42,000 per person and have an average of 50 public employees per 1,000 inhabitants.
• La Rioja received $94,000 per person and has 114 public employees per 1,000 inhabitants.
• This implies that La Rioja received more than twice the amount of co-participation and has more than twice of public employees per inhabitant than the national average.  

These data show that the main problem in La Rioja is not insufficient resources but an excess of public employment. Unfortunately, the case of La Rioja is not unique. Other provinces also benefit greatly from co-participation –Catamarca, Santa Cruz and Tierra del Fuego– and have more than 100 public employees per 1,000 inhabitants. Therefore, there is a latent risk that other provinces will imitate La Rioja.

Excesses in public spending, particularly in public employment, are promoted by the incentives generated by the co-participation of national taxes. On a daily and automatic basis, national revenues are transferred to each province based on very arbitrary parameters. Some provinces receive much more resources than they contribute, without any condition. The excess funding stimulates and enables provincial governments to carry out clientelistic practices. The expansion of the number of public employees to remain in power is just one example. Being privileged by co-participation is a factor of backwardness because it induces bad public management practices.

The damage caused by quasi-monies will not be avoided by increasing national transfers. On the contrary, the more resources are sent, the more the waste of public funds is encouraged. A tax system that eliminates co-participation is needed. Instead of centralizing the collection of national taxes and then distributing them between the national State and the provinces with arbitrary criteria, tax sources must be distributed. Under this logic, the provinces become self-financing with the total VAT generated in their territory, unified with the provincial sales tax. The collection continues to be centralized, only that the distribution is not by co-participation, but goes to the province where the value added was generated. For the provinces with a lower level of development, a Convergence Fund must be contemplated to allow them to continue operating normally, but at the same time impose the condition of applying a realistic and verifiable development strategy. 

The omnibus law proposes to reform some taxes. However it avoids a comprehensive organization of the tax system. This is a weakness that should be quickly remedied. The overall development of the country, especially of the poorest regions, depends on deactivating the perverse incentives generated by the co-participation of taxes.