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Pesos or Plastic? pp 33–58Cite as

Public Revenue, Financial Inclusion and Value-Added Tax in Argentina

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Abstract

Argentina’s tax-to-GDP ratio ranked at the bottom of worldwide tables of middle-income countries prior to the 2000s. By 2015, Argentina transformed from a low-tax to a high-tax country matching Brazil for the highest tax-to-GDP ratio in the region. No tax expert anticipated this outcome—quite the opposite. A rise in Value-Added Tax (VAT) revenue occurred as overall tax revenue increased, and this trend continued after a period of economic growth ended. This chapter explains how the government engineered this result by way of financial inclusion measures that targeted middle-class Argentines and their inclusion into the formal banking system. As financial inclusion drew more people into the formal banking system, consumers began to use less cash and more credit and debit cards causing more consumption to occur in formal markets (“easily taxed”) and less in informal markets (“less taxed”).

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Notes

  1. 1.

    Argentina in the twentieth century experienced six military coups (1930, 1943, 1955, 1962, 1966, and 1976); the last produced the military regime responsible for the Dirty War (1976–1983) and an estimated 30,000 Argentine deaths. Each coup had strong rural elite support and military regimes disproportionately targeted their violence toward urban political groups—labor unions, lawyers, university students and professors, and intellectuals—as well as implemented economic policies favorable to the agro-export sector. Also, Argentine coups are rooted in intra-military conflicts, these tended to pit the army, which heavily recruited from the interior, against the navy, which heavily recruited from the urban middle classes . Besides the Dirty War horrors, rapid urbanization and a dwindling rural population help to account for the lack of a military coup since 1983.

  2. 2.

    The political science literature links high tax revenue in a country to the strength of left-center and labor-based political parties, urbanization and the strength and autonomy of the state (see Steinmo 1993; Brautigam et al. 2008). Europe’s social democratic parties inspire this literature. By these assumptions, however, Argentina’s tax revenue during the past several decades should have been high. The pro-labor Peronist Party has been the strongest political force since the 1940s, rapid urbanization started in the 1950s, and state capacity is demonstrated by the country’s healthcare and education systems that were regional leaders in the twentieth century.

  3. 3.

    Three annual snapshots at decade intervals show trends in government spending-to-GDP in the Southern Cone countries of South America : 1977 (Argentina 9.02%, Brazil 9.44%, Chile 13.94%, and Uruguay 12.74%), 1987 (Argentina 4.71%, Brazil 12.16%, Chile 10.12%, and Uruguay 13.22%) and 1997 (Argentina 12.06%, Brazil 19.54%, Chile 11.12%, and Uruguay 11.04%). Argentine government spending was lower than that of its neighbors, especially so in the 1980s, and this pattern only changed, oddly, after Argentina adopted radical neoliberal liberalization policies in the 1990s at which point, Argentina caught up with Chile and Uruguay, but remained well behind Brazil. Finally, counter to conventional wisdom, Argentine annual spending ratios in 2016 (18.03%) and 2017 (18.11%) under current neoliberal President Macri were the two highest years since 1960!

  4. 4.

    Argentina ’s historic September 2018 agreement with the IMF for a record $57 billion calls on the government to reduce the budget deficit from its current 2.9 to 0% of GDP in 2019. Public spending cuts occurred in 2016 and 2017, including layoffs of 33,700 state workers and major cuts to utility subsidies, meaning it is tough to see how IMF conditionality is met without a major boost in tax revenue. Export taxes, slashed in January 2016, were reintroduced in June 2018 in consultations with the IMF, but the scale of revenue that will be needed must come from VAT . Neither the IMF nor the Macri government desires higher corporate or income taxes, as the IMF loan and program are tied to attracting foreign investment, and lots of it.

  5. 5.

    Boadway and Sato (2008) note that those who favor trade taxes over VAT stress the fact that the latter does not tax informal consumption , which can incentivize less formal consumption. In turn, trade taxes are easier to collect and harder to skirt (see Emran and Stiglitz 2005).

  6. 6.

    The 1990 reform follows the recommendations of a World Bank (1989: 67) assessment team in the country in 1989: “The VAT would be generalized to all goods and services, at a uniform rate, which could be the present 15 percent or the 18 percent prevailing until August 1988.”

  7. 7.

    Data on card ownership are only available annually and start in 2002. Card spending data are also annual and are available starting in 2007. Therefore, our models are limited to sample sizes of 14 (years) for models 1–4 and 8 (years) for model 5.

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Authors and Affiliations

  1. Department of Political Science and Sociology, Monmouth University, West Long Branch, NJ, USA

    Ken Mitchell

  2. Department of Economics, Finance and Real Estate, Monmouth University, West Long Branch, NJ, USA

    Robert H. Scott III

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  1. Ken Mitchell
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Correspondence to Ken Mitchell .

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Mitchell, K., Scott, R.H. (2019). Public Revenue, Financial Inclusion and Value-Added Tax in Argentina. In: Pesos or Plastic?. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-030-14876-8_2

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