Member of the Academic Council of Libertad y Progreso. Degree in Economics from Universidad Católica Argentina. He is an economic consultant and author of the books "Economía para todos" (Themes, 2002) and "El SindromeArgentino" (Ediciones B, 2006). He serves as a columnist in the newspaper La Nación. Previously, he worked the same task for the newspapers La Prensa (1985-1992), El Cronista Comercial (1992-2001) and La Nueva Provincia de Bahía Blanca (1992-1998). He's the host of the cable TV show "The Economic Report." Lecturer in Applied Economics of the Master of Economics and Administration of ESEADE, senior lecturer in Macroeconomic Theory of the Master of Economics and Administration of CEYCE. President of the Center for Economic and Institutional Studies. He was Economic Adviser to the Argentine Chamber of Commerce (1983-2002) and to the Argentine Chamber of Importers (1992-1993).
CATO: Roberto Cachanosky says that Argentina’s underdevelopment is not a problem that can be solved by taxing even more money from the taxpayer, but by making the economy attract more investment, become more competitive and, therefore, generate more wealth.
Economy Minister Sergio Massa announced an agreement with the US to exchange tax information. Although this is an agreement whose scope remains unknown, it is clear that the government is desperately seeking new sources of financing to get to the 2023 elections with as little economic crisis as possible. In this sense, they seems to be trying to scare people off and make a new money laundering scheme to provide more funds to the Treasury and, in this way, obtain more resources to cope with the electoral campaigns.
There are several problems with this issue. On the one hand, the tax burden paid in Argentina is gigantic compared to the quality of public spending offered, but this issue will be explained later.
Furthermore, people take their savings abroad because the Argentine state has confiscated the fruit of their labor several times. The Bonex Plan in 1989, the corralito in 2001, the asymmetric pesification in 2002 and the confiscation of savings in the AFJP (Retirement and Pension Fund Administrators) are some examples that can explain the distrust towards keeping your savings in the country.
The combination of a high tax burden with a history of confiscation of savings is enough of a stimulus for people to seek refuge for their money elsewhere, away from the hands of Argentine politicians.
Moreover, although some argue that it is a crime not to pay taxes, they can also been considered, in Bastiat’s words, legalized theft, using Bastiat’s words, because the state appropriates the fruit of the work of others to distribute it among those who did not generate wealth and thus obtain votes. In other words, charging huge taxes to finance vote-producing populism is typical of plundering states. Nothing very different from what King John Landless did in England, for which he was forced to sign the Magna Carta.
In Power and Prosperity, the economist Mancur Olson, who has worked in depth on the relationship between economic growth and institutional quality, argues that in societies where there is a lot of crime, less wealth is produced. In this case, he talks about common robberies, those criminals who steal the work of others at gunpoint.
Applying this line of reasoning to the state, when governments, using the monopoly of force that was granted to defend the right to life, liberty and property, use that monopoly of force to carry out legalized robbery, that is to say, he appropriates what belongs to others by means of a law, does the work of those who ask to take from another to give to them. Thus, the same effect is produced: people have to allocate more resources to protect themselves from the confiscating state, instead of allocating those resources to producing.
The “piqueteros” are a compelling example. Instead of going and stealing directly, these managers of poverty pressure the rulers to steal from those who produce and transfer the riches to those who live off the work of others, with the well-known cases of “leakages” of resources that remain by the wayside.
But it’s not just the “piqueteros”. The is another form of legalized theft in the form of protectionist policies that benefit certain industries and other mechanisms of compulsive transfers of resources from the sectors that generate them to sectors that do not.
Using the Laffer curve, which was made for the income tax in the US, we can see that there comes a point where the tax burden can continue to increase, but more and more is collected.
The vertical axis shows tax collection and the horizontal axis shows the tax rate that taxpayers must pay.
If the tax rate is 0%, collection is zero, but if the State collects 100% of what is generated, it also collects zero because there are no incentives to produce.
What the graph shows is that collection increases as tax pressure grows, but there comes a point where the tax burden is so high that it is no longer profitable for a business to produce and companies are closed or an informal market appears, because the premium for evading taxes is high enough to bear.
A numerical example can help to understand why it is false that taxes have to be lowered when evasion decreases. On the contrary, when the tax burden falls, evasion can be reduced.
Suppose the state levies a tax that appropriates 60% of the wealth that people generate. Under this tax burden and institutional conditions that discourage investment and production, the wealth generated by the country is $6,000 and the collection is $3,600 for those who pay taxes.
Now suppose that the tax rate is 20% and the wealth generated thanks to the low tax burden and institutional conditions is $30,000, the collection becomes $6,000. In other words, the state can collect more in absolute terms with a lower tax rate if people are encouraged to produce wealth.
A simple example, in 2021 the GDP of Argentina was USD 491,493 million and that of Japan was USD 4,937,422 million. Japan has a GDP 10 times that of Argentina, which has 2.78 million km2 of territory and Japan 377,915 km2, but Japan does not have the humid pampa, nor Vaca Muerta, nor lithium, but it has institutional conditions that stimulate investment and production.
According to data from the World Bank, in 2021 Argentina had a GDP per capita of USD 10,792 in current dollars to Japan’s USD 39,285. Collecting more taxes and plundering the wealth of those who produce is useless no matter how humid the pampa is.
In short, even by signing an agreement with the US, what the Argentine government could eventually achieve in the future is to collect more taxes on a given stock of wealth, but not increase the generation of wealth, because in order to increase the wealth that other institutional conditions are needed, including lowering the tax burden.
It is not a question of collecting more looking for where to scratch the bottom of the pot, but of making the economy have more investment, more productivity, more wealth and, therefore, a better standard of living.
In Argentina, the government went to the other side of the Laffer curve, that is, it is moving to the right of the graph instead of moving to the left by lowering taxes, which requires a decrease in public spending and institutional conditions that make it possible to create more wealth.
To follow this path is to end up distributing misery and never get the country out of poverty.
*Originally published at Infobae (Argentina).
