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matter of great concern to the IMF and the

would "save" from a default on the domestic

Group of Seven nations, which have urged

debt, the Argentine economy as a whole

the federal government to enforce greater

would lose. Domestic creditors of the gov-

financial discipline on the provinces. Their

ernment should continue to receive priority

concern is amply justified under Argentina's

over foreign creditors until the economy

current monetary policy. Under dollariza-

starts growing again and the foreign debt has

tion, though, the problem would diminish. If

been renegotiated. Unlike foreign creditors,

the federal government could not print

many domestic creditors have been forced to

money to fund the provinces, both it and

hold government debt by regulations or

they would be subject to greater budgetary

informal pressure by the Argentine govern-

discipline (though, to repeat, no monetary

ment. Foreign creditors knew they were mak-

system can guarantee budgetary discipline).

ing a risky investment by buying Argentine

Provincial governments would have more

government debt. The IMF should continue

incentive to solve their own financial prob-

its recent and commendable policy of not

lems, as is the case with states and munici-

bailing out foreign creditors.

palities in the United States.

A growing economy offers the best chance

Another way of improving the incentive

for holders of government debt, whether for-

for provinces to solve their own financial

eign or domestic, to recoup their losses. It

problems would be to change the nature of

would be in their self-interest to support the

federal revenue-sharing, or coparticipation,

policies suggested in this paper.

funds. The federal government could contin-

Cut Tax Rates Drastically

ue to collect taxes for the provinces but share

less of that revenue in the general pool and

Table 4 shows the rates for the major feder-

instead grant provinces some power to

al and provincial taxes. Adding up the main

impose surcharges. The federal government

federal taxes that apply to individuals makes

would distribute to each province the rev-

apparent how heavy a burden they are for citi-

enue raised by that province's surcharges.

zens who actually pay them, and helps explain

Efficient provincial governments would

why tax evasion is widespread. A comparison

impose lower surcharges and be more popu-

with the United States is instructive. U.S. state

lar with voters; inefficient governments

sales taxes range from zero to 9 percent (there

would impose higher surcharges and risk los-

is no federal sales tax); the top rate on federal

ing power to opposition politicians promis-

income tax is 39.6 percent (state rates range

ing lower spending and lower surcharges.58

from zero to 11 percent); the rates for Social

Without much

Security and Medicare taxes total 15.3 percent

Domestic and Foreign Debt

of wages; and there are no export taxes or

lower tax rates,

On December 23, 2001, then-president

financial transactions tax.

Argentina will be

Adolfo Rodríguez Saá announced that the

As has been mentioned, the De la Rúa gov-

government would default on its foreign debt.

ernment imposed large tax increases that took

unable to achieve

Internationally, the effect of the default has

effect in January 2000, April 2001, and August

good long-term

so far not hurt other emerging markets.

2001. Toward the end of 2001 tax revenue fell

growth.

Plan Bonos would have reduced the

sharply, especially in December, when the

domestic debt the government stuffed into

freeze on bank deposits began. The Duhalde

banks by, in effect, forcing it on depositors.

government has proposed, announced, then

Banks would have become financially

in some cases modified new taxes. It is repeat-

stronger while the government and deposi-

ing the mistake of the De la Rúa govern-

ment.59 Argentina needs to move toward fewer

tors would have become weaker. Whether or

not something like Plan Bonos is adopted, it

and simpler taxes, not more and highly com-

remains important for the government to

plex taxes. The government seems to have con-

fused tax rates with tax revenues.60 Although

pay its domestic debt. What the government

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