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Argentina: Provincial Clientelism the Hallmark of Federal Sharing of Tax Revenues

By: Contributor - May 16, 2014, 9:59 am

EspañolOn Tuesday, daily newspaper La Nación published an article about the discretionary powers enjoyed by the national government to redistribute public funds to the provinces, which is most often goes to politically maneuver allocations of such shared tax revenue. The article highlights, for example, the funds received by President Kirchner’s stronghold province, Santa Cruz, in comparison with other provinces less sympathetic to the government. Buenos Aires, Santa Cruz, La Rioja, and Jujuy provinces receive 30.6 percent of all funds that are distributed among the 24 provinces, and the inequalities are even greater when do the math in per capita terms.

The issue of revenue sharing in Argentina is a problem that has dragged on since 1994, when the constitutional reform required the enactment of a law to regulate the sharing according to new constitutional principles. The deadline for Congress to pass this law was two years. Eighteen additional years have gone by and Argentinean lawmakers have failed to meet a duty imposed on them by the Constitution.

Aerial view of Argentina’s Congress. Source: Wikipedia.

Besides the poor respect for the rule of law that afflicts our representatives, in general the need for redistribution of resources is defended on the basis that there are provinces that can’t fend for themselves. That is, they are not productive enough to sustain their public spending.

Some time ago I attended the presentation of a paper titled “Failed Provinces? Fiscal Adequacy Challenges in Argentina” during the V Latin-American Congress of Political Science. The authors, Roberto Dania and Constanza Mazzina, addressed the problem of fiscal adequacy and the ability or inability of provinces to cover for their own expenses in the case of a redesign of the Argentinean tax system accordingly.

The study shows that the number of provinces in this failing situation are eight (out of 24, one third). But one must wonder whether all those decades of subsidies did not detract from the provinces’ production capacity and fiscal responsibility. If provinces are accustomed to receiving handouts from the federal government, in return for their poor performance, don’t they lack the incentives to boost productive activities in their territories? And above all, as the authors of the study argue, if provincial spending is financed with tax revenues from the central government, don’t local governments lose the incentive to restrain expenditure?

One must also ask whether this disincentive to discipline local public spending is not one of the root causes for the persistent tax increases paid by citizens nationwide. And the fact that there are at present “failed” provinces does not imply that they are hopeless, that they cannot improve their financial situation by reviewing their budgets or policies.

As Friedrich Hayek and other prominent liberal economists have argued, government intervention only distorts the economy. How do we calculate the damage caused by the existence of taxes at multiple levels of government and the discretionary transfer of resources from the central government?

We must not forget that the discretion allows for corruption and cronyism to flourish: the more money in the hands of politicians, the more opportunities for embezzlement schemes.

Political debate in Argentina, as always, diverts toward issues that if resolved, would not bring any tangible benefits to citizens. We invest a huge amount of time and energy trying to optimize the sharing revenue system between the national and local government. But why don’t we address the huge web of taxes trapping citizens, which is largely fueled by the fiscal mess in the provinces, perpetuated by the federal sharing of tax revenues? Why aren’t we debating the urgent need to simplify the tax code? Do we not care about securing judicial and fiscal stability for entrepreneurs to conduct their affairs in peace?

Let’s stop arguing about how the local or federal government share our money. We should rather come up with a way to reduce the government’s ability to tax us, and strive to simplify the tax system so that it distorts incentives for growth and development as little as possible.

Translated by Daniel Duarte.