TAX AND CO-PARTICIPATION REFORMS GO HAND IN HAND 

The President called on the provinces to sign the “May 25th Pact” in Córdoba. He presented it as a Decalogue to lay the foundations for the transformation of the country. The fourth point of the Decalogue proposes a tax reform and the fifth is the rediscussion of the co-participation. Both issues are closely intertwined and should be addressed together.

Currently, the national and provincial tax burden is 28% of the GDP. A 14% of the GDP are taxes co-participated in halves (7% for the Nation and 7% for the provinces). The Nation keeps 16% of the GDP because, to the 7% of the co-participation, it adds 9% of the GDP with taxes on foreign trade, social security and tax on Checks. The provinces keep 12% of the GDP, because they add provincial taxes to their 7% of the co-participation. This scheme allows the Nation to spend on local functions through transfers to the provinces (1.5% of GDP) and on energy and transportation subsidies (2.5% of GDP).

An alternative is to return to the methodology originally contemplated in the Constitution. That is to say, distributing taxing powers instead of distributing revenues, as is done by co-participation. The scheme would be as follows

• The Nation is financed with all income tax, foreign trade and social security taxes which represent 12% of GDP.
• The provinces are financed with VAT –absorbing the provincial Sale tax– and property tax –unified with provincial taxes on real estate and automobiles– which will allow them to collect approximately 14% of GDP.
• A transitory Convergence Fund financed with the tax on Checks with 2% of GDP to promote the development of the northern provinces.  

These data show that it is feasible to advance in tax simplification through the unification of taxes and simultaneously tend to fiscal correspondence. That is, each level of government should be financed with its own taxes. Co-participation is replaced by the Convergence Fund. A smaller mechanism focused on redistributing resources in favor of the poorest regions. The Nation loses income (from 16% to 12% of GDP) but this is compensated by the elimination of transfers to provinces (1.5% of GDP) and economic subsidies (2.5% of GDP). In this way, these components of national spending, which give rise to eternal conflicts and discretionalities between the Nation and the provinces, are eliminated.

With a tax system of these characteristics, the structural lack of financing of the Province of Buenos Aires is solved. This jurisdiction is the most affected by the co-participation rule that was negotiated in 1987 and never modified. In the 90’s the damage was alleviated with the Conurbano fund which was later reduced in real value by the inflation of the 2000s. More recently, the Fiscal Strengthening Fund for the province of Buenos Aires was created, taking part of the co-participation from the City of Buenos Aires, but the current government eliminated it, leaving the province of Buenos Aires once again underfinanced. The solution is not to create another patch like prior patches. The final solution is that Buenos Aires should be financed with the taxes paid by its inhabitants.

Another factor to consider is that the northern provinces currently have much more productive potential than in 1987 when the current co-participation rule was defined. The exploitation of their natural resources, agro-industry and tourism, among others, allow these provinces to be self-financing. In the transition, it is pertinent to contemplate a Convergence Fund to avoid a traumatic change. But it has to be conceived as a transitory promoter of development plans and not, as it happens with the co-participation, as a permanent financier of spurious public employment.

It is very important not to repeat the hypocrisy of the 1994 constituents and the innumerable fiscal pacts of the last 35 years, which they limited to declaring the need to sanction a new co-participation regime. Nor is it useful to subordinate the tax system to the public expenditure reduction, as has happened so many times in the past. Tax regulation and the replacement of co-participation must be addressed simultaneously with public expenditure reduction.