The good, the bad and the ugly

Buenos Aires Herald. 28 de mayo de 2016.

If the funds from the new tax amnesty law go for current expenditure instead of infrastructure, it will be a new lost opportunity

I do not like to pay taxes, and I am sure you do not either. However taxes are necessary for a well-functioning society. With that money the government can provide services which are used by all citizens like infrastructure, those that improve productivity for the whole society like education or transport, or services which are just a pure joy, like a ballet company.

When someone doesn’t pay taxes, they are not abiding by the social contract. However, when the government does not provide good-quality services, it is not fulfilling its own side of the social contract. We all know that services in Argentina are not high quality and many people use that as an excuse not to pay taxes. What is worse, despite a critically high tax burden, the government spends even more money and Argentina runs a deficit for very poor quality services.

In my opinion, the real reason for not paying taxes is that the tax structure in Argentina is extremely heavy. It is impossible to pay everything, not only because it is a lot of money but because it is a very complex system. Of course, I am talking about the people who perform legal activities. People who work in the underground economy or who perform illegal activities do not pay any taxes and under no circumstances can the quality of government services be used as an excuse.

There will soon be a whitewash, whereby people who have not paid their taxes can have some sort of amnesty or lenient treatment. Yes, it is unfair on those who have paid their dues. And yes, people who have not paid before should have some sort of differential treatment compared to the people who have always paid. The fact that the government needs money should not be something that allows a Jubilee. There should be a carrot and a stick.

Let’s consider the point of view of those who have not paid taxes. Why should they bring their money back now? Why will they feel safe now, if before they thought it was not a good idea to keep their money in Argentina? Whether because they believe that the local tax authorities will find them or because suddenly they have a rash of patriotism, some people will tell the authorities about some of their money. But only if they feel that there will not be a change of rules afterwards. That is probably the reason why the many whitewashes Argentina has had in the last few decades have not been successful — local authorities like to hunt in the Zoo. Promises about no further prosecutions have not been fulfilled.

So what is different now? Essentially, governments of the world have agreed to share information against tax evasion. That means that even if people have their money in a different country, local authorities may find them. And then the consequences will be ugly.

The new law will apparently have a lot of give and takes, and there are still a lot of unknowns. Congress may decide that proceeds will go to certain specified purposes, like paying retirement arrears or giving a blank cheque to the government. The fine to be paid may be high or low, the opportunities to keep on hiding that money may be unknown, the fairness of the whitewash as compared to law-abiding citizens may be infuriating but we know that the government needs the money and it is better to have it somehow than not having it at all. And tax offenders will have to assess if it is better to pay now or eventually face bigger problems in the future.

What will government do with the proceeds? It is a very important question, because if this windfall is used only for current expenditure, it will be a new lost opportunity. If however money is used for capital expenditures, that is, infrastructure or other kinds of investment, it may be a very wise decision. In financial terms: this will be a one-off income which should be used for one-off investments, or lowering liabilities. It should not be used to compensate for the fiscal deficit, tempting as it is.

So the good thing is that the government will have more money, the bad thing is that it is unfair to those people who have already paid, and if tax offenders do not use this opportunity, it should be ugly for them.