Establishment of Export Tax in Argentina - Term Paper Example

EXPORT TAX IN ARGENTINA Introduction Export taxes particularly on agricultural exports are familiar with Argentines. The taxes have stood for decades both to raise government revenue and to deter farmers from selling food abroad that is needed domestically. Most of these taxes were hacked during the 1990s under the tenure of President Carlos Menem with his free-market policies. Recent export taxes in Argentina began at ten percent in March of 2002 following a recession and loss of external financing that plunged government revenue. Since 2002, export tax rate has been adjusted upwards from the initial ten percent on all exports to a fixed rate of 35 percent in 2003. High export taxes have pitted the government into perpetual conflicts with Argentine farmers who are very instrumental to generation of the country’s GDP (Richardson, 2009). Although export taxation rates have been rising since their establishment in 2002, together with the other newly established recent taxes on commodities such as biodiesel, the current president Christina Fernandez’s March 2008 decree to raise export taxes on Soybeans from 35% to 45% as well establishing new taxes on other agricultural products including wheat, yielded the most serious conflict between the government and farmers who felt that the government was in a mission to confiscate their money (Bloomberg 2008). Moreover, the decree sparked protests by the farmers and their sympathizers, which led to the farmers cutting off export grains, hence, adversely affecting countries relying on Argentina for agricultural imports. The protests further affected consumers due to severe shortages of agricultural products in supermarkets and traffic jams at the height of the widespread chaos, which would not make the government easily compromise its position and give in to the farmer’s demands by rescinding the tax increases, given the huge amount of revenue the government expected to leap from the increment. However, in July 2008, farmers got a reprieve when the Argentine Congress narrowly rejected the export tax increase decree, restoring the export tax to the previous 35% (Bloomberg 2008). This research paper analyzes the establishment and magnification of export tax in Argentina and the forces underlying these tax changes. Special focus is given on the 2008 tax increment decree. Establishment of Export Tax in Argentina Export taxation has been an Argentine practice for decades. In 1990s, then President Carlos Menem reduced most of the export taxes in line with his free markets policy. In 2002 at the peak of an economic crisis and a huge fiscal deficit, President Duhalde introduced substantial export taxation at 10%. His Economy minister announced the new taxation policy seemingly in regret and desperation; appealing to the Argentine fraternity to understand the crisis the country was undergoing. Moreover, he assured the public that the export tax was temporary and geared towards preserving social programs that were important during the acute recession the country’s economy was facing (Richardson 2009). Analysts observe that most of the incremental from revenue from the taxes was used to subsidize basic commodities for the poor Argentines who had been hit hard by the country’s declining economy. However, the government did not live up to its promise that the export taxation would be temporal. Thus, in the same year, confronted by a declining economy, the government raised export taxes on various products including a rise in the export tax on Soybeans to 23.5% to generate more income to stabilize domestic prices. However, despite these measures, by the year 2002, the country was on a verge of sinking into political and economic collapse due to persistent devaluation of Peso and default in payment of foreign debts (Richardson 2009). In May 2003, Nestor Kirchner was elected the Argentina’s president. In moves aimed at stabilizing the economy, the new president rushed to purge the nation’s military and police leadership off authoritarian figures. Further, in pursuit to make human rights central to his regime, Kirchner further took steps to fight injustices in the highly politicized judiciary, which was regarded the most corrupt institution of the country, by signing a decree that allowed repatriation of former military officers accused of human rights’ violations. Thus, with the 2004 confession by the IMF that it had contributed to the argentine’s economic crisis together with other international financial organizations’ that funded the infamous military regimes in previous decades, provided Kirchner’s administration with a solid ground to default in repaying foreign creditors while he hoped to bolster economic recovery from high international soybean prices and increased demand for the country’s major exports (Freedom House, 2009). Moreover, in the earliest of 2005, the then minister to the Economy Roberto Lavagna declared an end to a three year war to restructure the country’s defaulted debt, with over three fourths of Argentine foreign bond holders who agreed to a payment of 30 cents per dollar, hence, marking the starting point for economic improvement. The restored economic stability and the historical largest debt reduction by a developing nation, helped Kirchner’s Peronist party to gain popularity thus resulting increase of the party’s legislative numbers in the 2005 elections. Further, in 2006, Kirchner executed a sequence of measures centralizing political & economic power in the branch of executive. The congress conferred him power to reallocate government expenditure as he deemed fit, as long as the overall appropriation would not be changed. Kirchner also adjusted the tax systems to limit the influence of the powerful provincial governors. He also created new State Corporations and nationalized some privatized companies (Freedom House, 2009). Therefore, Kirchner inaugurated a new era of export-oriented populism to the country. Because some agricultural products such as soybeans are not usually consumed by the domestic working class, Mr. Kirchner freely introduced tax on exports and channeled the revenue to his political strongholds lieu from the traditional populism where promotion of export and populism conflicted directly. Moreover, during this period Kirchner was able to promote exports and at the same time raise export taxes while subsidizing production of wage goods thus enabling him please industrial and labor organizations, which helped him ascend to power, thanks to the Argentine undervalued currency. In addition, Kirchner was able raising the export tax on soybeans from the previous 23.5 percent to 27.5 percent in January 2007 and used the new revenue generated to subsidize the costs of wages of production. This policy functioned to lower domestic food prices by increasing domestic supply (Richardson 2009). Further, as the 2007 elections neared, Kirchner increased government expenditure in a bid to improve his political party’s chance of winning. Thus, to finance his spending, Kirchner suddenly raised export taxes on Soybeans from 27.5% to a fixed rate of 35% in 2007 resulting to an increase of the central government’s revenue by 54.3 % than the year 2006 (Richardson 2008). The largest expenditure increases were in transfers to the public (70.7%), public sector (66.4%), and public works investments (62.4%). This resulted to critics and analysts suggesting that this the 2007 fiscal policy was a political move aimed at canvassing votes in the 2007 election because Kirchner’s constituents were concentrated on urban areas and hence would benefit from the public works investment allocation. Nestor Kirchner passed the concentrated political and economic power to his wife, Christina Fernandez, who became the president in 2007 (Richardson 2009). Magnification of Export Tax Assisted by her husband’s spending spree, Christina Fernandez de Kirchner won the 2007 presidential elections succeeding her husband as the President of Argentina. In substance, she started to rule in tandem with her husband. She did not waste time and immediately, she raised export taxes on soya beans and introduced new taxes on other agricultural products for export such as wheat through a decree in March 2008. This was a progressive export tax system. Under this system, the taxes were to be tied to the world market commodity prices. Soybeans market prices at the time corresponded to an export tax of 44.1% (Knowledge@Wharton, 2008). The president was comfortable to do a decree rather than legislation in the congress because the Argentine law allowed the president to enforce taxes by a decree without the need for approval by the congress (Richardson 2009). Furthermore, her political coalition dominated both houses of congress, something that assured her the bill would pass in any case if was presented to the congress. In addition, her husband Mr. Kirchner, was the leader of the strong Peronist party and thus she enjoyed immense political influence in the both houses of congress. Moreover, Martin Lousteau, the minister of the economy at the time also presented a new tax regime, which together enabled the government to fetch an additional $23 billion per year (Knowledge@Wharton, 2008). Therefore, different from the previous export tax increments, the inauguration of the progressive tax system was heavily resisted by farmers (Richardson 2009). They contested that the move was aimed at ripping them off, and they poured into major highways to protest against the tax increase decree. They erected road-blocks and stopped shipment of food products countrywide demanding that the government restores tax to the previous fixed rate of 35% (Bloomberg 2008). The government declined giving in to the farmer’s demands and appealed to the urban working class, arguing that the recent prosperity by the farmers threatened the elimination of essential social programs, if the new taxes were rescinded. The president personally emphasized the importance of the tax increment arguing that if the export taxes were withdrawn, the development that had been witnessed in the past six years of her husband’s presidency would be lost adding that unemployment would crop up, and commodity prices would escalate resulting to another recession. In addition, she described the large-scale farmers as “Oligarchs” who had made supernormal profits from the global boom in product prices. She asserted that the farmers’ extra-ordinarily high wealth had to be redistributed to the less endowed Argentines (Bloomberg, 2008). President Christina Fernandez export tax decree was not without a political shadow. Her claim that economic repercussions of removal of the tax increments would be a reflection of what was experienced in 2001 and 2002 was not entirely true. In general, the elimination of export taxes on primary commodities such as soya would cause a rise in the marginal production cost for producers of products that use soybeans as inputs, such as soybean oil. This would result into decrease in supply of the soya related products and subsequent rise in prices of these products thereby decreasing employment as a result of collapse of the Soy industry (Richardson, 2009). However, her claim that returning the export tax rate to the previous 35% would throw the economy into a recession as the country had experienced in its years of economic crisis was deceptive. Prices of commodities such as soybeans and their derivatives are of little impact to the Argentines because most of these commodities are not consumed domestically as final products. In addition, the economy had already experienced recovery in the years 2003 to 2007. Therefore, the importance of a 44.2% or even a 35% export tax in order to prevent a recession was difficult to prove in view of past experiences (Richardson, 2009). The Kirchener government stance in increasing export tax was certain. She viewed it as a way to redistribute wealth and as a way of preventing further accumulation of wealth. She asserted that it was impossible to redistribute wealth without cutting down extraordinary profits that the wealth class people generated. However, by virtue of economic facts discussed above, whether Kirchners’s principal objective was genuinely intended to redistribute wealth or to perpetuate Kirchner’s dynasty (her husband had done this) remains a contentious issue. However, it is apparent that the government’s view of export tax clearly changed from unfortunate to valuable (Richardson, 2009). In addition, it is imperative noting that it is only a few groups that supported the new export taxes. The government enjoyed support from the cabinet who argued that, the high commodity prices in the global market had left the big farmers better off than most citizens. Her coalition party members also supported the governments move, notably, the Front Wing for Victory lead by Augustine Rossi, which asserted that the large-scale farmers deserved to pay higher taxes (Knowledge@Wharton, 2008). Notwithstanding, the protests saw the farmers man hundreds of roadblocks across the nation hindering food deliveries, subsequently leading to shortages of by shortages of milk, beef, cooking oil and other agricultural products in the supermarkets. Further, the farmers also cutoff exports a move that led the government reacting to the demonstrations by terming the farmers as greedy, unpatriotic and coup plotters. However, the farmers vowed to continue with the demonstrations until the government submitted to their demands (Knowledge@Wharton, 2008). That notwithstanding, many groups also opposed the export tax decree. Four institutions representing the farming sector (Rural Argentine Confederations, the Agrarian Federation, Conanigro and Rural Argentina society) supported the farmers in their protests. Pablo Orsolini, the then vice president of the Agrarian Federation complained that none of the revenues collected from export taxes by the central government was shared with the provinces. This was true because the federal government was not obliged under the country’s constitution to share revenue from export tax with the provinces, but allowed the government to freely distribute the revenue in ways it deemed fit. Thus, this resulted to most of the revenue being directed to subsidize wage goods hence successfully, improving the welfare of the industrial working citizens at the expense of the farmers (Knowledge@Wharton, 2008). Moreover, the decree was also opposed by people from main cities who engaged in noisy political protests on behalf of the farmers. This was inspired by the food shortages that hit the consumer sector and the escalation of food prices at the height of the farmers’ protests. For instance, in the central market outside Argentines capital, Buenos Aires, the distribution centers of most of the countries fruits and vegetables, one Argentine told the New York Times, “People are uncertain about eating, about spending on food.” Therefore, for majority of Argentines, the farm crisis stirred awful memories of the severe economic crisis in 2001 when the value of Peso dropped in days causing many to go without food. The people, therefore, in their distress supported the farmers’ demonstrations (Knowledge@Wharton, 2008). In addition, economists and other scholars also criticized the government for the export tax increment particularly with reference to the economic deterioration witnessed in the period of the farmers’ demonstrations. Ernest O Connor, an Argentine economist contested that the economy had abruptly collapsed and there had been a very sharp slowdown in the economic activity at the height of the farmers-government conflict thus significantly slowing the annual Argentine’s economy growth. Further, investments had been crippled, consumption postponed, supply of commodities cut off all culminating into the inflation problem becoming more serious. Another macroeconomics specialist, Osvaldo Cado, created a detailed report about the adverse effects the country’s economy was experiencing from the government’s export tax increase move and the subsequent conflict with farmers. According to the report, the country’s Central Bank had immensely lost reserves and Argentinas risk significantly increased as private deposits declined (Knowledge@Wharton, 2008). Further, Carlos Malamud, a researcher for Latin America affairs, at the Elcano Royal institute, Spain, said that the government decree was all about the urge to raise the tax surplus and to tighten control over the supply of the funds that were directly collected and spent without any controls enacted by the legislature or international institutions. He faulted the Christina Kirchner government for not negotiating with the farmers and rather choosing to engage in mere power play in institutional and political terms (Knowledge@Wharton, 2008). Some intellectuals in disapproval of the government export decree argued that the crisis Argentina was undergoing was a political crisis not directly related to a serious economic situation. They contested that the situation was a political crisis that had yielded a deteriorated economic situation. According to them, the Argentine economic situation was stable and blossoming despite some problems such as inflation and energy supply terming Nestor Kirchner government, the worst political managers in Argentine history and the heart of the problem in Argentina. They cited a presidential tandem as being in operation in Argentina, involving the former president Nestor Kirchner and her wife, who was the president at the time of the farm crisis (Knowledge@Wharton, 2008). Further, the president’s tactics to solve the conflict often fanned the flames of the crisis. After mega protests in the country, she attacked the leaders of the four major farmer’s associations at her rally in the capital, terming them as ‘four non-elected people. “In her rallies, she made no reference to the thousands of farmers who had been at the center of the conflict. Several meetings were convened with the farmers, but the president could not discuss the contentious tax issue making the farmers suspicious that she would pass the issue to her coalition controlled congress (Bloomberg, 2008). Since the signing of the decree, her public support plummeted with her approval rate falling to almost 20% in opinion polls. In a move to legitimize the progressive export tax system, she forwarded the proposal for voting by the congress in June, 2008. This move was welcomed by the farming sector associations and was followed by evacuation of farmers from roads and highways after lifting their three months strike. As already mentioned, her political coalition controlled the two houses of Congress and, therefore, she was almost certain the proposal would pass, also considering her political influence and that of her husband, the immediate former president Kirshner Fernandez (Bloomberg, 2008). After long hours of over-night debate, the lower house of the congress narrowly passed the agricultural export tax increases by (129-122). The 129 votes were only one vote deficient the minimum the government required for approval. At least 20 legislators in the ruling coalition deflected to vote against the proposal. It was estimated that 153 legislators of the 257 legislators were Kirchner supporters, but only 129 voted in favor (Bloomberg, 2008). The senate narrowly rejected the proposal voting 36-37. Julio Cobos, the then Argentina’s vice president broke the tie after almost 18 hours of emotive debate among the senators. In a weary voice, the vice-president sounded remorseful as he gave reasons for voting against a measure that the government that he was part of had worked so hard to protect. He argued that he would not vote for a law that did not offer a solution to the conflict and asked for forgiveness from the government if he were wrong in voting against the proposal. For the Kirshners, Mr. Cobo’s vote was destructive and was likely to compel them to regulate their bruising political tactics and look for more consensuses for congressional elections that were imminent. The farm leaders called Cobos’s action patriotic but to a political analyst, Artemio Lopez the action was the start of a political institutional crisis. Later on, Cobos cited the president’s refusal to allow minor modifications to the proposal to have triggered him to vote on the contrary. He asserted that if the government wanted to redistribute wealth, it had to create it (Richardson, 2009). Therefore, this defeat was a clear indication of the president’s loss of power and legitimacy in her political household. It was an insight for her that if she were to continue ruling the country effectively, she had to revise her ruling style. The vote was not anticipated to be so close but earlier a pro-farmer march on Buenos Aires in which an estimated 235000 people participated was attributed to have altered the standpoints of most pro-government senators compelling them to vote against the proposal. However, analysts said that the government had been so naive regarding the magnitude of support that the farmers had garnered both in the provinces and Buenos Aires, the capital. In July 18, the president revoked the decree, restoring the export tax rate to the previous 35% fixed rate (Freedom House, 2009). In March, 2009, the farm groups launched new strikes similar to those witnessed in 2008 over the progressive export tax system. The latest strikes were motivated by the government rejection of the farmer’s demands to decrease export tax and rather offered to share 30% of the export tax revenue with the provinces. The farmers rejected the revenue sharing offer terming it as a deceptive compromise designed to channel money to the president’s political cohorts to help them in their legislative elections. Concerning the revenue sharing plan, the farmer’s association leader Eduardo Buzzi termed the plan as an electoral ploy aimed at luring mayors and governors to the government’s side. The revenue sharing plan could as well have been a clean bill, but the government did not disclose the recipients of the shared revenue. The destination is at the president’s discretion, further sparking suspicions that that the plan would be politically inspired (Freedom House, 2009). In the recent years, the Argentine government has continued to interfere with the export sector by either hiking export taxes or restricting exports. In 2012, the president issued a decree to raise tax on biodiesel (soybean derivative) exports, a move that was purported to be essential to make domestic fuel more affordable. There was tension that the government would also hike export tax on soybean and spark conflict such as the one experienced in 2008.The government dismissed these claims. Tax on biodiesel was raised from 20% to 30%. The government justified the tax increase on the ground that Argentines were paying more for biodiesel than foreign buyers. During the same period, the Argentine government issued a decree to lower the official price of local biodiesel by 15%.This move was not met without opposition. Industrial people contested that the decree threatened to kill the biodiesel industry because the demand in the domestic market had no capacity to absorb all the biodiesel that is exported. The energy minister dismissed this assertion arguing that the new measure was far much better than ones that would hike export tax on soybeans (Economist, 2014). Christina Fernandez government maintains a tight control in corn and wheat export even without necessarily interfering with export taxes. The system, the government claims is meant to guarantee affordable local food supplies. Christina Fernandez was re-elected in 2011 on promises of the government continuous improvement of the country’s economy. The decree on export tax on biodiesel was preceded by another decree requiring oil companies operating in Argentina to present an annual investment plan. Non-compliance could attract fines or sanctions such as pulling out of concessions (Economist, 2014). In 2013, the government intervened in wheat export following an anticipated poor harvest. The government suspended all exports of the crop and for the first time in 25 years; the country did not export any wheat. The government, however, reiterated its commitment to a gradual restoration of wheat exports in light of improvement of harvest. The government’s action was not welcomed by the four major agricultural associations which issued a statement that the government continued interference in the agricultural sector would only destroy production. They accused Christina’s government of attempts to flood the local market with wheat to suppress inflation, which was unofficially approximated to have increased by 28% in 2013, at the expense of the farmers. Other agricultural based associations accused the government of schemes to gradually kill wheat industry in view of the increasingly small land allocated to the crop (Economist, 2014). Conclusion In countries like Argentina that have experienced political and economic crises which have ravaged lives of many, Interest groups, collective action and social movements are indispensable. There are different such groups in Argentina. Some groups unite unemployed workers in order to push for their interests. For example, in the event of the economic collapse in 2001, which left over 50% Argentines in Buenos Aires and its environs below poverty line and at least two-thirds of the urban workforce jobless, the Piquetero Movement was central to advocating the interests of the impoverished Argentines to the regime (Galafassi, 2009). Other groups unite farmers and they play an important role in struggle against unjust economic policies such as the unnecessarily high export taxes on agricultural commodities. These groups include the Rural Argentina Society, Rural Argentina Confederations and the Agrarian Federation. The four groups have been pushing the Argentina’s government to lower export taxes on agricultural commodities. Other groups have advocated human rights and democracy in Argentina since the era of military regimes. However, in the recent years, civic organizations have lost their popularity due to corruption scandals and internal divisions (Galafassi, 2009). Definitions/Concepts Peso: Argentine Currency Progressive export tax system: A taxation system in which the export tax payable is directly proportional to the global market price of the export product. Soybean: A multipurpose crop and the major Argentina’s export commodity. The crop is used for human and animal consumption, fuel production and as an input in a wide range of industrial goods. Analytical Approaches Analysis of time series data on export tax rates in Argentina and the global forces of demand and supply from 2003 to 2014 leads to a conclusion that the government and its supporters argument in favor of the tax scheme based on redistribution of wealth is likely to be false. It is much more likely that the Kirchner administration favored the industrial sectors over the agricultural sectors, most likely because they constituted the largest voting bloc. Bibliography Bloomberg, 2008. Argentina Revokes Decree on New Farm Tax Regime (Update1) - Bloomberg. [online] Bloomberg.com. Available at: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJ0h0O0iOM00 [Accessed 28 Oct. 2014]. Economist, 2014. Against the grain. [online] The Economist. Available at: http://www.economist.com/blogs/americasview/2014/01/argentinas-wheat-exports [Accessed 30 Oct. 2014]. Freedom House, 2009. Argentina. [online] Freedomhouse.org. Available at: http://www.freedomhouse.org/report/freedom-world/2009/argentina#.VE_kkVeyH1U [Accessed 30 Oct. 2014]. Galafassi, G., 2009. Social movements, conflicts and a perspective of inclusive democracy in Argentina. Democracy \& Nature, 9(3), pp.393--399. Knowledge@Wharton, 2008. Farming Conflict in Argentina: Cristina Kirchner Confronts the Goose that Lays the Golden Eggs - Knowledge@Wharton. [online] Available at: http://knowledge.wharton.upenn.edu/article/farming-conflict-in-argentina-cristina-kirchner-confronts-the-goose-that-lays-the-golden-eggs/ [Accessed 28 Oct. 2014]. Richardson, N., 2009. Export-oriented populism: commodities and coalitions in Argentina. Studies in Comparative International Development, 44(3), pp.228--255. Richardson, N., 2009. Export-oriented populism: commodities and coalitions in Argentina. Studies in Comparative International Development, 44(3), pp.228--255. Read More