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The IMF should

· Eliminate all changes to the tax code

that tax rates are too high, and that the way to

increase revenues is to reduce rates. For at least

since August 1, 2001, that have

continue its

some taxes, Argentina seems to be on the wrong

imposed new taxes or made the tax sys-

recent and com-

side of the Laffer curve.61 High tax rates reduce

tem more complex.

· Combine lower and simpler taxes with

mendable policy

revenues in two ways: by reducing the amount

produced of the good being taxed by those who

greater enforcement.

of not bailing out

pay the tax, and by increasing the incentive to

foreign creditors.

evade the tax for people who do not pay it. It has

Further reductions would be desirable

been estimated that Argentines evade the value-

later. At present, tax rates are so high that

added tax, the government's biggest generator

they encourage massive evasion. Reducing

of revenue, in 40 percent of transactions.62

tax rates now and continuing to reduce them

Lower tax rates would improve the long-

in the future can significantly broaden the

term growth prospects of the Argentine econ-

base of taxpayers. Over the next five years, the

omy. Lowering tax rates is a calculated risk,

government should aim to reduce the value-

but raising tax rates has not worked well, so

added tax to 10 percent and the proposed

persisting with high tax rates is at least as risky.

flat tax to 20 percent.

The Duhalde government has expressed a

It is instructive to compare the experience

desire to reduce tax rates, but so far it has not

of Argentina with that of Ecuador over the last

actually cut any rates. It can encourage sustained

few years. Argentina's tax revenue has been

economic growth by making a commitment to

falling, while Ecuador's tax revenue from

cutting tax rates consistently for a number of

sources other than oil has increased from the

years (potentially through 2007, if President

equivalent of US$1.5 billion in 1999, the last

Duhalde is still in office by next year and is reelect-

year before dollarization, to US$2.4 billion in

ed). A good model to imitate is Ireland, which has

2001 and an expected $3 billion or so in 2002.

cut the rates on one or more of its important

In the first three months of 2002, federal tax

taxes almost every year since 1987.63

revenues fell 16 percent in Argentina com-

The government needs to begin with an

pared with the same period a year before; in

immediate, dramatic tax reduction, which

Ecuador, nonoil tax revenues rose more than

35 percent.64 Part of the increase in Ecuador's

should include the following components:

nonoil tax revenue reflects prices catching up

·  Cut the value-added tax from the current

to world levels after falling far behind in 1999.

main rate of 21 percent to 15 percent.

The increase remains impressive even so, for it

Eliminate the special rate of 27 percent.

has consistently exceeded forecasts. The

· Combine the payroll tax (for social

underlying cause of the difference is that

security and medical care) and the

Ecuador's economy has been growing while

income tax into a flat-rate tax of 25 per-

Argentina's has been shrinking. Argentina's

cent with no exemptions. (A flat-rate

nominal tax revenues will soon begin rising,

personal income tax of a sort already

but it will be mainly because they are expressed

exists, but it applies only to nonresi-

in depreciating pesos; expressed in dollars, rev-

dents and the rate is 35 percent.)

enues are likely to continue shrinking.

· Eliminate the financial transactions

Government Spending

tax (though if the banking system is

substantially "offshorized," the tax will

Although there are government functions

not apply to offshore transactions any-

that are notoriously overstaffed (the bureauc-

way).

racy of the congress, the top ranks of the mili-

· Eliminate the presumptive minimum

tary) or inefficient (universities), it has proved

tax, the personal assets tax, and recent-

politically difficult to reduce their spending.

ly imposed export taxes on agricultural

The government should focus on increasing

goods.

revenue rather than on cutting spending. An

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