Manuel Solanet: “The Current Tax Sharing Agreement Allows Abusive And Centralist Practices”

VIA PAÍS – The economist Manuel Solanet warns that the current federal Tax Sharing Agreement system allows “abusive and centralist practices” of the National Administration and that it also leads to the fact that there are no policies focused on reducing tax evasion in the provinces.

Solanet assures that there will be no better distribution of resources without changing the current system of collection and vertical distribution for a more horizontal one.

What is your opinion towards the decision of the Federal Government to subtract funds from Buenos Aires Autonomous Capital to transfer them to the province of Buenos Aires?

It must be objected that it was not an anticipated measure so that the City could reschedule its expenses. On the other hand, measures such as these show that there is an exercise in abusive centralism.

Does the nation has the competence to do what it did?

The Government has taken advantage of the possibilities it has of modifying the secondary distribution coefficients of the Federal Coparticipation by decree. It is an issue that has been dragging on because this regime allows it and it is one of the reasons why it should be modified with a thorough reform.

What should this thorough reform consist of?

Tax powers that they once had must be returned to the provinces. The provinces must once again take over the collection and administration of direct taxes, such as Gains on individuals, fuel, personal property and internal taxes. Only taxes that strictly cover their spending should remain in the collection of the national government.

What would happen to distorting taxes like Gross Income?

It must be replaced by another to the Final Consumer Sales and calibrate its aliquot with that of the VAT (national) to achieve a result of primary distribution between the Nation and the set of provinces that does not alter and that connects with the one resulting from the Coparticipation regime in force.

What would be achieved with this?

Progress would be made in a mechanism for greater fiscal correspondence. But with one caveat: as the current system is redistributive, this system would require as a second step a mechanism of horizontal redistribution between provinces so that there is a connection with the current legislation.

What would be the advantages of such a change?

Once the mechanism is in place, if a governor wants to increase his spending, he should raise his own taxes. There will be a quality leap in the responsibility of each administrator when making a decision.

But wouldn’t this risk widening the economic gap between burgeoning provinces and others that are structurally poorer?

No, that’s why there should be a horizontal redistribution mechanism. This is so that the starting point of the new regime overlaps with the current one, so that there is no reason for the provinces with less contributory capacity to oppose the change. From there, the system of rewards and punishments, of correctly oriented incentives, should operate.

Awards and punishments?

What has happened in recent decades is that many provinces have a very high percentage of their resources coming from national taxes compared to what they contribute. It is as if they spent with someone else’s wallet. They have the benefit of spending more but not the detriment of imposing higher taxes on their residents. And this is determinant of a tendency to spend more and badly and also to protect tax evasion within a jurisdiction. These are the possibilities offered by the current co-participation system.

Why would the governors be protecting evasion?

If a tax is evaded within a province, 100% remains within it. Money moves there. But if it is paid, only a percentage returns through the current federal co-participation mechanism. If taxes were the power of the provinces, the governors would have to work harder and better to combat tax evasion because that would give them more resources.

Do you see political room for progress in a real debate to change the partnership system?

Yes, there is. Because this is not to the detriment of any particular province but to the benefit of all. It is a general benefit for the country. What is happening in Argentina is that public spending has been increasing at all levels of government. And that expense is unsustainable: there is no possibility of covering an expense of 45% of the Gross Domestic Product with genuine taxes. So, you have to look for mechanisms that align the incentives to spend less and better.

If it is changed in this sense, would not Nation be weakened?

Greater horizontality in the distribution of resources would reduce the capacity of the national government to act centrally and abuse its power. There would be greater independence from national resources. Now, the Government also has discretions to grant funds outside the automatic mechanism of co-participation, it uses that power to obtain benefits in partisan objectives.

Would there have to be changes in the political system to accompany this change in partnership, such as going from a presidential system to a parliamentary one?

Not at all. The federal tax sharing was born in Argentina in 1934. That is, the Nation lived for more than 120 years without a federal sharing system. Until that moment, the Nation had determined by Constitution what taxes it was responsible for charging and which ones fell to the provinces. It is perfectly applicable to the presidential system.

By Javier Álvarez, Buenos Aires correspondent

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