In recent sessions of the Argentine legislature, more and more senators from various political factions have been repeatedly absent. Their failure to create a quorum in the legislative chamber has postponed the ability of that body to deal with some very important topics, such as a controversial plan to reform how taxes collected from check transactions are shared between Argentina’s national and provincial governments. Finally, last Thursday, after 12 hours of debate, the upper house approved the proposal.

Now, the proposal must be approved by the lower house. If that happens, there remains a possibility that Argentine President Cristina Kirchner will veto the law to avoid changing the tax regime.

The proposal was made by senators opposed to the government of Kirchner. Their goal is to give the provinces more than 50% of the funds collected via the tax imposed on Argentine check transactions. If the initiative is approved in the Chamber of Deputies, it will drastically change the way those tax revenues are shared: Today, only 30% of the funds from the check tax go to the provinces. The rest goes to the country’s national treasury. Of this 30%, 15% goes to the national social security fund. In other words, out of every 100 pesos collected, 80.52 pesos go to the national government; 14.98 go to the provinces, and 4.50 go to the social security fund.

The so-called “check tax” — more formally known as the “tax on bank debts and credits” — was created in 2001 by Domingo Cavallo, then Minister of the Economy, as a temporary measure to deal with the deep economic and fiscal crisis facing Argentina. Inspired by previous experience in Brazil, the national treasury opted to collect a tax of 0.6% of the value of each check transaction.

“This tax is highly concentrated in favor of the national government, and its collection is carried out in an immediate way,” says Enrique Dentice, researcher at the San Martin National University. Currently, “70% [of the money] goes directly to the [national] treasury, and the remaining 30% is shared [by the national and provincial governments] according to the parameters set by Law 23 548. The opposition [now] proposes to extend ‘joint participation’ [co-sharing of the revenues] to 100% [of the funds collected], which would mean almost 8 to 9 billion pesos [of additional revenue would go to the provinces].”

In 2009, the national government collected 20.5 billion pesos (US$5.3 billion) through the check tax. That is “approximately 11% of the total tax collections of the AFIP, Argentina’s federal administration of public income [the equivalent of the U.S. Internal Revenue Service],” says Carlos Olivieri, director of the business sciences department at Austral University. Olivieri adds, “The most important taxes, insofar as their level of collection, are the value added tax (87.385 billion pesos, or US$22.5 billion) and the income tax (55.5 billion pesos, or US$14.3 billion). That makes the check tax the third most important source of tax collections” in the country.

According to experts, the check tax is considered “distortive” because it has a direct impact on economic transactions, and it makes the entire chain of production more expensive. In addition, since it is debited from each banking transaction, it promotes activity on the black (or “informal”) market, and other efforts at tax evasion. The principal sector affected by this tax is small and midsize business, since smaller companies are mostly financed by checks.

Ernesto A. O’Connor, director of the program of analysis in the economics department at UCA, the Argentine Catholic University, notes, “This not only imposes a burden on formal banking operations – and thus encourages under-the-table dealing and evasion – but it is also an excessive burden on the flow of production, since it is imposed in addition to the value added tax.”

On the other hand, Olivieri adds that the check tax “is not collected as a function of the degree to which a person can pay it. [It is a flat tax.] Some activities develop within the informal economy because people don’t want to bear the check tax burden, and that affects the rest of the government’s tax-collecting activities.”

A Delayed Reform

This much is clear: Beyond the current debate about how to share revenues from the tax, the national government has slyly declared on several occasions that it could eliminate the tax in 2011. Amado Boudou, the minister of the economy, told the local press, “As the president said, this tax is distortive and [its elimination] would strongly encourage the spread of banking, and weaken the informal economy.” For more than six years, former President Nestor and current president Kirchner have governed Argentina. Yet they have yet to enact any tax or credit reforms that support or strengthen the interests of small and midsize companies.

O’Connor does not believe that the national government is likely to decide to eliminate the check tax, “because of budgetary restrictions, and because [the national government] has been plagued by a deficit since 2009.”

Olivieri agrees. “The government currently does not have a surplus, so it doesn’t have the ‘luxury’ of doing without this tax. In addition, it cannot do without a source of income that compensates for the decline in the immediate availability of cash. So the possibility of replacing this money, or finding an alternative source for it, is remote.”

In any case, Dentice suggests, “It would be better to stop using this tax and use other taxes instead, such as the value-added tax and the income tax.”

In reality, all this talk about the permanency of the check tax distracts from another fundamental issue: the restructuring of Argentina’s tax system. Dentice says that Argentina’s citizens are “facing the absence of a true federal tax law that corrects these distortions, which [the government has] avoided tackling ever since December 26, 1996, the date that was set by the constitutional reform of 1994 in order to achieve that.”

Along the same lines, Olivieri believes that only two options are left open to the government. “On the one hand, carrying out a fundamental restructuring of the Argentine tax system; and on the other hand, carrying out drastic measures for cutting public spending. We consider both options unlikely because they would involve a very high political cost during the presidential elections of 2011; and because the President has already announced that she is not going to lower expenses (subsidies, social initiatives, public job policies, and so forth).”

The Battle of the Provinces

Why are Argentina’s provinces fighting so furiously for approval of this proposal? Most of the country’s 23 provinces face significant financial challenges when it comes to paying the salaries of workers in the public-sector, the main source of jobs in many municipalities. Add to that the high inflation rate, which could easily exceed 20% this year.

“This reform could serve as a way of paying for current expenses – that is, salaries,” reflects Dentice. “In addition, it makes it clear that provincial governments are finding it impossible to be more efficient about using their own resources. What they [want to] approve [with this reform] would partially correct the problems of the provinces, but it would put the national government in a predicament.”

Olivieri warns that the decline in economic activity in several provinces and the rising cost of salaries must be addressed in the short term, because these issues “affect extremely sensitive areas such as education and safety. Unfortunately, some provinces could succumb to the need to issue quasi-currencies, repeating the negative experience of the crisis at the end of 2001.” (Quasi-currencies were emergency bonds issued between 2001 and 2002, in an effort to create a parallel currency, and alleviate the enormous financial and economic crisis.)

If the provinces ultimately lose the possibility of sharing 100% of the check tax, “the deteriorating trend in fiscal federalism will continue. The provinces would have to be more and more dependent on the federal government, and their debt to the federal government will increase,” notes O’Connor.

Incentives for Small and Midsized Companies

Neither the provinces nor the central government has gotten around to thinking about the needs of the companies that finance the check tax – that is, those companies that leave behind 0.6% of each debt and credit that they transact in Argentine banks.

If the deputies of Argentina’s lower house approve the law, and the executive branch does not veto it, “this will be a great help to small and midsize companies, since their debts and loans account for 60% of the money collected through this tax,” says Dentice.

According to Olivieri, “If this tax were eliminated, some activities would no longer be marginal. The collection of value-added taxes (VAT) could be strengthened and improved, as well as other taxes that are tied to invoicing. Small companies are probably the ones that try the hardest to avoid these taxes, given their lack of access to credit; the scant margins that many of them operate on; and their need to compete against companies that operate under more advantageous conditions because of their [larger] size.”

O’Connor agrees. The companies that would benefit the most, he says, would be “formal companies, rather than those that operate partially in informal [or black] markets. At the same time, this measure would promote the spread of the formal economy, as well as improve access to bank loans for those companies that do not have access today.”

In any case, experts believe that small companies should not anticipate that their problems will be significantly resolved when this tax disappears. Although the government provides significant subsidies to companies and sectors that are in trouble, such as Aerolineas Argentinas, public transportation services – and even television football broadcasts – Argentina’s production capacity must await the sorts of incentives that would help it to grow.

Olivieri notes some of the initiatives that would be desirable: “They could create fiscal incentives for new investments, and labor market incentives for creating brand new jobs. They could facilitate regulations that promote exports from companies that have a shortage of infrastructure; and raise customs duties on imports that compete with local industry.” Finally, he adds, “Small companies should have open access to markets with transparent, professionalized capital.”

What they haven’t done is “to create a business climate; an investment climate. Later, they should provide the economy with sectoral, horizontal and vertical instruments that strengthen its competitiveness.”

In 2010, as much as 24 billion pesos (US$6.2 billion) could be collected through the check tax. It is still unclear how this pie is doing to be divided.

Framing Contests: Strategy Making Under Uncertainty