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ARGENTINA: THE COUNTRY OF THE PERMANENT CRISIS
DID THE ARGENTINE TAX SYSTEM COME TO STAY FOREVER?
A REPEATED BORING HISTORY

Hector R. Sandler, ICE/Director
Instituto de Capacitacion Economica
Para la constitucion de una nueva economia nacional
www.icepal.com.ar

The bases, structure and scope, of Argentine tax system has not changed from the decade of 1930s. During that time, by cause of the great world crisis, the main income fell for the national State. This income, originated from tax and fees put to exports and imports. To the judgment of some Georgist Argentines, that was the first opportunity to appeal for the economic rent of land value.
The Conservative party who was in power at that time, opted for implanting the income tax in 1931 instead of collecting land value taxation. It is easy to see why. The Conservative party represented the interests of the biggest owners. The second opportunity to appeal for the economic rent of land value was in 1946, when millions of workers were supporting president Perón in any government action. Peron had such strength because of the workers who supported him, that in 1949 he even changed the National Constitution. Of course it was easier to reform the tax system in order to complete the settling of the whole country, but he did not. This was a great opportunity. After the end of Second World War millions of Europeans were wanting to find a " promised land" somewhere in the world, while Argentina was still unpopulated (less than 15 million inhabitants in 2.700.000 km2).
But either Peron did not know this, or it did not want to do it. He preferred some other kind of changes: to increase the workplaces through the nationalization of public services and companies of public goods, to promote industrial activities, and to dictate laws favorable to workers. Peron thought capitalists and workers had opposite interests and his mission was to harmonize them. However the thoughts of the British economist Keynes had a lot to do with what was done with the Argentine economy at that time. Keep this idea in mind: The dominating economic thoughts determine the measures that governments take. In other words, the people who govern do whatever technicians in economics tell them to do.
The third opportunity was given when democracy was reestablished in 1983. In particular when a very important economic reform was carried over by president Menem.
In what taxes concern, Peron maintained the existing system created by conservatives, who punished consumption, work, and investment. Also, its results: earnings, benefits, wages, interest and capital. The well-known prejudices that this tax system brings to economic activity did not appear clearly during the first nine years of Perón’s government (1946-1955). The strong transformation made by the new economic order and the monetary system, produced such large and novel effects, that the issue of the taxes was putt off to second place.
In spite of expectations and plans, the new economic order generated a chronic invisible monetary inflation. That inflation made itself patent with the overthrow of the Perón’s government in 1955. Only in 10 years, the inflation rate had been about 400% (In 1943 one dollar was 4 pesos; in 1955, it oned was 16 pesos)
In 1955 Argentina entered a great turbulence zone, in the field of the ideas as well as in the institutional order. I couldn't give here details about this long process. From 1955 to 1983, the most assorted and tremendous facts occurred than one could imagine: politically, economically, and of cultural character.
The chronic monetary inflation contributed to ignore the actual harmful taxes system at that time. People were not concerned to pay taxes, because the government maintained inflation active. On the other hand, why would the government force itself to gain tax money persecuting its debtors, if instead they could gain money through currency emission? This allowed government and citizens to live without being worried about taxes.
The awful side of inflation appeared during the 1970s. The rulers and the governed were not prepared to understand and anticipate what was about to occur. Since in 1969 till 1976 Argentina suffered riots, guerrilla warfare and death's squads. The deep root of all this was actually inflation. From 1976 to 1983, there was military repression, tortures and about 30.000 missing Argentines. Finally Argentina suffered the first defeat of his history fighting against United Kingdom. Of course, nobody -- except a few georgists -- wanted to see that taxes had a lot to do with this catastrophe.
In 1983 democracy came back to Argentina. She had punished itself in a way that it was never thought of. After this tragedy, Argentina understood a great lesson out of this prostration, and reacted healthily in 1983. This was the year were Argentina came back to road of the law and the democracy. The government of Raúl Alfonsin (1983-1989), who was member of the Radical party (traditional adversary of the peronism), made a big effort in preventing that the country would fall in the terrifying alternation which consisted in jumping from weak civil governments to terrifying military dictatorships and vice versa. But Alfonsin did not realize the threat of the inflationary demon. He belonged to a generation that would not see in the inflation as poison on contrast as a medicine. Of course he was ignoring that a society that was caught by more than 40 institutional inflation years, could not be released without categorical and firm governmental actions.
I can give a personal experience back in1984, when I came back to the Argentina, and president Alfonsin welcomed me in the government house on January 6, 1984. Both of us had been representatives at the National Congress in 1963. We talked approximately half and hour. He asked me about economic situation, and as I knew how he ignored the inflation problem, I explained to him, as softly and painlessly as possible, that if he did not stop it, he would be in very dangerous situation. Well to make a long story short, he just stood up and left. He jumped as a spring, and almost shouted to me: We are going to stop it! We are going to stop it! Though he said nothing about how thought to do it. Then, when was leaving the meeting, he accompanied me, and in soft voice told me: Would you like to prepare some paper with your ideas on how to solve our economic problem? Of course, I answered him. Then, the following day he received my georgist paper. But he preferred to solved the economic problem another another way. I kept the copy the paper in my file.
At the beginning of Alfonsin’s administration in 1984, the inflation rate was about 11% every year. One year later 35%, and finally hyperinflation exploded in his hands in1989. As I had warned to him before, it ended his mandate. He renounced five months before end of his regular period. The political crisis could happily saved because by mid 1989 Carlos Menem was elected president.
When president Menem came into office, he did not know what to do. Only two years later, in 1991, president Carlos Menem put a start to change the economic order. Nobody believed that he could change the country like a pancake, without any opposition whatsoever. There was no resistance or opposition to this like in other governments had occurred, the people were already defeated because of the past crisis. Again for the third time the opportunity to reform the tax system came, but there were not enough ideas to make this reform take place.
The main target of Menem’s administration was to balance the national budget. Reinforcing the existing taxes and creating others of the same class did this. Again, dominant economic technicians operated over the government.
The return to power of the party founded by Perón, which is inclined to populism was not permitting many expectations. But history has proven itself, it has always unexpected outcomes. Unexpected in this case was that Menem did not govern as Peronist party member, neither with Peronist ideas. Once Menem came into office, he realized that right wing ideas were being imposed in the world. This world context imposed other internal and external policies. Menem fulfilled a merely conservative program. He had a successful start thanks to the apparent success of reganomics and the fall of the Soviet Union.
To cut roots of inflation through any possible means became the principal objective during Menem’s administration. This decision was complied rapidity and with surprising easiness by several reasons. 1. A debilitated public opinion convulsed by Argentine history, disposed to accept anything to get out of that economic swamp. 2. A new generation of professionals in economy and law. Many of them graduated in the United States. 3. Local interests pressured in the search for a new prospect. 4.The diligent action of international finance manipulators looking for emerging markets. 5. And finally, the ideas originating from the IMF and the World Bank. The action of all these factors and the absence of heavily-formed opposing thoughts, which permitted a general privatization process. Argentina was going back to the 1930’s.
Privatization meant for the State to be released of a lead lifeguard. However the majority, do not clear have a conscience of the economic disorder that was caused by the large and extended nationalization. It was a pity that the lack of an adequate theoretical conception system prevented healthy results with entrusting the production and consumption economy to private hands. To a large extent, the combination of interests and ignorance transformed monopolies and state privileges into monopolies and private privileges. This is far much of constituting a social free market economy.
The monetary inflation was cut practically in 24 hours, but not only by the privatizations, although without them to cut inflation would have been impossible. The law of convertibility ("Ley de convertibilidad") assured by legal means, the free change between national currency and foreign currencies at the rate 1 peso to 1 dollar.
But this law might not have been effective in the facts without the accumulating reserves in currencies in sufficient quantity as to make effective the free change. The drawback, which encloses a latent danger, is that the greatest share of those reserves that came from international loans. With this external public debt has grown from 60 billion to more or less 130 billion. This debt compels to destinate huge part of the income from taxes to the payment of its services. Some experts have calculated that the Argentine public debt is about 54% of GNP, and 6.4 times its annual exports.
However, monetary stability began quickly to give its fruits. Since 1991 until 1993 the people lived a stage of prosperity. The economic calculation was possible for producers and consumers, and the economy grew. The Austrian economist Luwdig von Mises was right: monetary stability pushes economic activities. But if we do not change the actual tax system, eventually a crisis will appear. Here is where the American economist Henry George was also in the correct side.
According with the dominant official knowledge and the conditions "negotiated" with the IMF, the key of prosperity depended on having a budget with zero deficits. From an accounting point of view there are only two ways to achieve this objective: to reduce public expenses or to increase income. In spite of the speeches, appearances, privatizations, and the massive dismissals, Menem chose the two ways. He increased income by taxes and loans, and instead of reducing government expenditure, he increased it, and occasions by squandering.
In this new Argentine context, the issue of resources system of the state passes to be a priority. If we succeeded in collecting taxes where it really should be, then there will be an excellent economic order. If the actual system is maintained, serious problems will keep on going. The issue of taxes absorb the minds and energies of the government and citizens, converting into the axis of the public policies and private lives. But the tax problem is a different question of that of the tax system. In Argentina everybody talks and discusses about taxes, but no one does about tax system.
A market economy plagued by monopolies, with a stable currency supported by a legal regime, while the owners of the land obtain benefits of its crescent value, economic depression will quick appear. The economic depression by both sides: consumption and production, impact negatively against the actual tax system. There will be less income for the treasury. The ghost of deficit of the budget reappears-
An apparently logic reaction, is to appeal to increase the existing taxes to create others and to make more severe the collection of them. The direct effect is transforming the depression into recession. Menem ended his mandate with these awful numbers: 3 million workers without jobs, more than 10.000 firms in bankruptcy, and hundreds of riots in several towns of the country.
After Mennen’s administration, in 1999 Argentina elected a new president. He is and teaches law and is attorney. His name is Fernando de la Rua. He belongs to the Radical party as well as Alfonsin, but he has arrived to that position as candidate of the Alliance. The Alliance is a political union formed between the Radical party and other minor parties. In fact the Alliance argument to win the presidential elections were to present a different ideological point of view than that of Menem. Without a doubt in many aspects the Alliance presents many differences with Menem. But are there any differences in what taxes matter? No.
On 18 of April 2000, De La Rua presented himself on national radio and television and to urge the people to pay their taxes. In contrast he did not tell the people that in January he was going to severely raise income tax, and include new payers to the list. This brought more people who were not forced to pay income tax before, to pay it. In contrast, during his election campaign, De La Rua promised to cut taxes.
During his inaugurating speech the parliamentary meetings in March of 2000 he said: " I have increased the taxes because I need money". If we think about it, it is not really a very deep reason neither a different moral of the everyday thieves would invoke in Argentina. It is not necessary to say taxes whose payment is demanded by De La Rua are the same his predecessors used.
On May 5 (2001) , the people of Buenos Aires had opportunity to protest against De La Rua's tax policy. Citizens were summoned to choose a new mayor. The De La Rua's party candidate was a young lawyer named Ibarra without any significant background, while his opponent was the former Economy Minister Domingo Cavallo. Who in 1991 dominated inflation. Ibarra won by almost 50% of the votes. Cavallo just obtained 33%. There are different reasons to explain this outcome. However, one thing is clear: the people did not link governmental policy with the taxes they have to pay. For people "in the life there are two unavoidable things: death and the taxes", as once Benjamin Franklin said. Taxes would be a matter of fact. Government can only increase or decrease what the people have to pay. There are not different tax systems for them.
Again, last March 25 and following days (2008) , the people of all country have make tremendous protest against the national government (President Christina Fernandez de Kirchner) because high taxes on the agrarian sector. The people (and intellectuals) have not clear idea about the root of these “permanent” crisis.
This long story leaded me to this conclusion: if Argentine people do not change their knowledge about the complex tax question, no change will ever be possible. Argentine people need to realize the complex links between laws, social order, morality, prosperous economy, and tax systems. Our people have to become aware of their individual responsibility in order to establish a good society. And that this task demands to learn about tax systems.
From this point of view, the Instituto de Capacitaciòn Economica (ICE) has for a long way to come through: to help people learn the right tax system.

Buenos Aires, March 27, 2008

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