Tax rebellion in Argentina and Ronald Reagan

by Marcos Hilding Ohlsson *

"Our federal tax system is, in short, utterly impossible, utterly unjust and completely counterproductive, [it] reeks with injustice and is fundamentally un-American... it has earned a rebellion and it's time we rebelled". Ronald Reagan.

These few words seem to best describe the current situation in Argentina, as if Ronald Reagan had been living in Argentina 2008. People from other countries who only read IMF reports, or any simple macroeconomic study, must look at our ratio of government taxes to GDP and think that 27% is not that bad (even though it is the highest ever); it is actually less than most developed countries. But what people do not know is that 45% of all employers are not registered and tax evasion is the rule, not the exception. You need only shop for any good or service to quickly notice this.

This is a result of both bad fiscal control and an excessively high tax burden on those who do pay. According to our calculations, the average worker pays between 55% and 65% of their income in taxes assuming they do not evade, 55% for a low wage workers and 65% for a highly paid workers. But the problem has worsened in the last few years.

The government has artificially kept the exchange rate undervalued in order to prop up local import-substituting industrial production. But both overly expansionary fiscal and monetary policies have put pressure on inflation. As a response, and in order to keep prices under control, the Kirchner administration has decided not only to set price controls and to freeze utility prices, but also to deliberately manipulate the Consumer Price Index (CPI) and, thus, the official inflation rate. There are two reasons for this. The first reason is to influence inflation expectations. The second reason, which is not so obvious, is to pay less interest on inflation-linked public debt bonds. This is an Orwellian scene, where instead of dealing with reality the government denies the existence of inflation by altering the way it is measured. Changes in CPI methodology that in early 2007 seemed minor have now become grotesque. Last march, for instance, two provinces posted monthly inflation rates of over 4% –close to 50% if annualized. Meanwhile, the official national inflation rate was of only 1.1%, which, is under 10% on a yearly basis. Private consensus is around 25% and growing. The consumers expect inflation to be 32,8% in the next 12 months.

One cannot help but wonder what all this has to do with taxes. The answer is that in order to keep prices in check the government has had to subsidize several sectors such as energy and transport. As inflation raises prices and erodes the values of these subsidies, government is forced to raise taxes further in order to keep pumping money into these sectors.

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." Ronald Reagan

After the devaluation of 2002, the Duhalde administration passed an export tax of 20% on commodities, in an attempt to profit from soaring world prices for these products. But by 2007, when inflation had grown and the Kirchner administration needed more cash for redistribution purposes, it increased export taxes to 28% and then again to 33%. Apart from this, the government introduced regulations in the milk and frozen meat markets, leading to serious shortages and mounting public discontent. All this, however, was presented as a public struggle to protect consumers instead of as a failed attempt to regulate prices. The “good” government was protecting the people from selfish farmers. As a result, Argentina now exports less meat than Uruguay, which has 10% of Argentina’s population. Most of the agricultural industry is heavily burdened with the costs of an inefficient government.

"The federal government has taken too much tax money from the people, too much authority from the states, and too much liberty with the Constitution." Ronald Reagan

Things got far worse last March 11th, when former finance minister Martín Lousteau raised export taxes on commodities once again. This time, however, a sliding tax-rate was introduced, meaning that the rate would increase as world prices increased and, if prices eventually reached a given threshold, the rate would be set at 95%. Soy beans, the most profitable crop, were particularly affected, with tax rates on their exports rising to 44%. That, of course, does not take into account VAT or income taxes. This tax hike was the point of no return. Farmers around the country decided to go on strike and to block roads to prevent farm product from reaching urban centers and ports. There were over 300 different road blocks and the cities slowly began to feel the consequences. Once again Americans were protesting “no taxation without representation”, because this tax raise had not been passed by Congress, but implemented by the federal government through a decree. Export taxes are federal and thus not rebated to provinces. Moreover, they do little to help bridge the income gap between the federal and provincial governments, since income taxes are collected by provinces. Another federal victory at the expense of local governments.

Responding to protesters, President Cristina Kirchner, gave an aggressive speech that not only showed here lack of knowledge on how the agriculture industry works but also reflected her dislike of free workers, causing an immediate repulse protest of common citizens in main cities. Government sent paid organized gangs to intimidate the crowd. Only by miracle there was no serious injury. Due to the escalation of aggression, the farmers decided to stop the strikes and protests, giving government a one month truce to offer solutions. With only one week left before the truce is over, there are no clear signs how all this mess it will end.

"The silver lining is that this is the biggest tax rebellion in Argentine history. People are awakening; they gather in the streets and protest against unfair taxation, realizing that that the burden of all government action will ultimately be paid for with taxes and: Government is not a solution to our problem, government is the problem." Ronald Reagan

"I hope we have once again reminded people that man is not free unless government is limited. There's a clear cause and effect here that is as neat and predictable as a law of physics: as government expands, liberty contracts." Ronald Reagan

* Marcos Hilding Ohlsson pushes the Foro Republicano initiative in Argentina.

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