Tax Systems and Tax Reforms in Latin America
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WORKING PAPER No 587 March 2007 TAX SYSTEMS AND TAX REFORMS IN LATIN AMERICA Edited by LUIGI BERNARDI, ALBERTO BARREIX, ANNA MARENZI AND PAOLA PROFETA JEL Classification Numbers: H2 Keywords: Tax Systems, Tax Reform, Latin America società italiana di economia pubblica dipartimento di economia pubblica e territoriale – università di Pavia Countries Studies of Tax Systems and Tax Reforms in Latin America CONTENTS 1. ARGENTINA by Martin Bès 2. BRAZIL by José Roberto Afonso and Rafael Barroso 3. CHILE by Matteo Cominetta 4. COLOMBIA by Luigi Bernardi, Laura Fumagalli and Elena Fumagalli 5. COSTA RICA by Jorge Cornick, Eric Thompson and Adrian Torrealba 6. MEXICO by Daniel Alvarez 7. PARAGUAY by Caterina Ferrario 8. URUGUAY by Alberto Barreix and Jerónimo Roca 1. ARGENTINA by Martin Bès Inter- American Development Bank - Washington Abstract This paper is part of a wider research on “Tax Systems and Tax Reforms in Latin Amer- ica”, carried on at the Department of Public Economics of the University of Pavia, under the direction of L. Bernardi, A. Barreix, A. Marenzi and P. Profeta, and the supervision of V. Tanzi. This paper reviews Argentina’s tax system. After a general introduction, the second section describes the reforms of the tax system that took place between 1990 and 2005. The third section presents the institutional features of the principal taxes collected in the country while the final section explores ideas for a future reform agenda. Reference Author: Martin Bès - [email protected] Keywords: Tax Systems, Tax Reform, Argentina JEL Codes: H20, H24, H25, H29 1. Introduction and contents∗ Upon taking office in July 1989, President Menem embraced a reform agenda aimed at re- verting the previous decade of economic stagnation. The reform program faced serious im- plementation issues, as exemplified by the initial privatizations that did not adequately ad- dress regulatory issues while attempts at stabilizing the economy after the hyper-inflation bouts of 1989 and 1990 were short-lived. In January 1991 Domingo Cavallo was appointed Economy Minister, and his first concern was re-establishing credibility in the Administra- tion’s economic policies. At the heart of this lack of credibility were the fiscal imbalances that had stubbornly resisted policymakers over the previous decade and which ended up be- ing monetized and reflected in very high inflation. External and Fiscal Balance % of GDP 10 5 0 80 82 84 86 88 90 92 94 96 98 2000 02 04 -5 -10 -15 Fiscal Deficit (-) / Surplus (+) Current Account Cavallo introduced a currency board, which came to be known as convertibilidad. This monetary regime required that the monetary base be backed by foreign currency at an exchange rate of 1 peso per 1 US dollar. This rule prevented the government from balancing its accounts by printing money, reduced the ability of the Central Bank of acting as a lender of last resort to the financial sector and eliminated the possibility of indexation, all of which ∗ I want to acknowledge the discussions on fiscal issues maintained over the years with A. Barreix as well as his insightful comments to this paper. I have also benefited with discussions with and/or comments from R. Car- ciofi, J. Roca, R. Ruiz del Castillo, E. Díaz Bonilla, M. Brusa and A. Marenzi. M. V. Cabo was invaluable in collecting information and assisting with the formatting of this document. Of course any mistakes in it are my own. Finally, all opinions expressed in this document are of my sole responsibility. 2 were perceived as the ultimate causes of inflation1. A law was passed in support of the monetary regime in order to enhance its credibility, demonstrating the political system’s commitment to it. Convertibilidad was in place for over a decade, until its collapse amid Ar- gentina’s political and economic meltdown in December 20012. An improvement in fiscal performance was a requirement of Convertibilidad. On the expenditure side, there was a widely held view that while the level of spending was more or less rigid its composition was not. Financial support of state enterprises would be eliminated as a result of the privatization program, but these resources would be required to increase health and education spending as well as the transitional costs of economic reforms. The conclusion was that the thrust of im- provements in fiscal accounts would need to come from the revenue side. The reform of the tax system implemented at the early 1990s was designed to support fundamental economic reforms required by the new development paradigm adopted by the country. A brief reference to the time period will enhance the readers’ understanding of the re- forms. While sixteen years may not seem an extensive period in a country’s history, it would be a mistake to assume that the economic policies implemented since 1990 were unchanged throughout this period. As a result several sub-periods are specified in order to facilitate the understanding of this chapter. In the field of tax policy, changes were introduced in response to the government’s reform agenda, to variations in policymakers’ preferences as well to changes in the economic constraints, mainly from the international arena. A time line sum- marizes the domestic and the international events that took place during this period and pro- vides context for the policy reforms in tax policy described in the chapter. The first period runs from mid-1989 to 1995, during Menem’s first term. Its high- lights are an initial four years of economic reform, which taper out as the Constitution is modified in order to allow the president’s reelection while the first major emerging market crisis of the decade takes place (Tequila). During the second period, which runs from 1996 to 1999, the reform agenda was reduced to fine-tuning first generation reforms as no political consensus emerged regarding the direction of additional measures. This was mainly due to Menem’s ambitions of a third presidential term, which distracted political capital from eco- nomic reform. Even though the country’s expansive fiscal policy was inconsistent with Con- 1 Additionally, the widespread use of indexation mechanisms made changes in relative prices costlier in terms of inflation and/or economic activity, reducing the effectiveness of exchange rate adjustments in order to increase the relative price of tradables vis a vis non-tradables. 2 The Convertibility Law was abandoned on January 2002. This only formalized the end of currency board, which had effectively collapsed by early December, 2001, when the “Corralito” was introduced. Measures were implemented between March and December of 2001 with the aim of introducing flexibility in the monetary re- 3 vertibilidad, access to international financial markets allowed policymakers to procrastinate in adopting policies that would reduce fiscal imbalances. This was a period of intense vola- tility in emerging markets, triggered by Thailand and South Korea’s external collapse in 1997 and followed by comparable events in Russia (1998), Long Term Capital Management (1998) and Brazil (1999). Timeline 1990-2005 Background: Tax Collection as % of GDP 40.0 Argentina's Asian Russia Brazil Tequila Crisis LTCM Meltdown & Recovery 35.0 Convertibilidad Peso Devaluation 30.0 Tax Reform 90-93 supports Tax reform attempts Tax reform pursues Economic reforms 90-95 Competitivenes Fiscal Solvency 25.0 20.0 15.0 10.0 5.0 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 National Provincial The third period extends from December 1999 to December 2001. The main focus of the new government that took office in December 1999 was to restore fiscal solvency, an in- creasingly challenging task as the economy reacted negatively to fiscal adjustment and inter- national financial markets signaled Argentina as the next major emerging economy that would face a currency crisis. While different changes in economic policies were attempted, they hardly qualify as economic reforms, but rather as desperate, and in the end futile, at- tempts to ward off devaluation and default. The fourth and last period began in 2002 and continues until today. It started when the authorities formally abandoned the currency board regime in the midst of a political meltdown and an unprecedented economic collapse. The new monetary and exchange rate framework that emerged in 2002 was followed by policies gime to jump-start the economy, which was by that time in a period of severe depression, and avoid default in Argentina’s sovereign debt. For a description of Argentina’s collapse see Mussa (2002) and Blustein (2005). 4 devoted to produce a fiscal surplus in response to the goal of reducing economic vulnerabili- ties and to the limited access to private financial markets and foreign resources3. An overview of the development of the tax system since the ear1y 1990s will be the subject of the second section. The economic goals pursued by policymakers, their choice of tax policy instruments and the main results presented within a macroeconomic framework will be explored in this section. A description of the main taxes currently collected in Argen- tina will be presented in section three. At the national level this involves the income tax, the VAT, excises on a group of selected products, export taxes, import tariffs and social security taxes. The two main tax assignments of the provinces, the turnover tax and property taxes are also presented4. A final section will explore some ideas for a reform agenda for Argentina’s tax system. 2. The evolution of the tax system since the ear1y 1990s This section explores the main changes introduced in Argentina’s tax system since 1990. These reforms are conceptually linked and, revenue sharing arrangements aside, these taxes ultimately all feed into the government’s revenue pool.